For many Australians, self managed superannuation funds (SMSFs) represent a pathway to greater control over retirement savings including property investments. However, a common question arises – can you live in a property owned by your SMSF when you retire?
This article explores the conditions under which this is possible, the implications of capital gains tax and the necessary steps to transition your SMSF property into your personal asset.
Understanding SMSF property rules
The Australian Taxation Office (ATO) imposes strict regulations on how SMSF members can use their properties. While you cannot reside in an SMSF property while the fund is active, retirement opens avenues for personal use under specific conditions.
- Sole purpose test
The SMSF must be maintained solely for the purpose of providing retirement benefits to its members. If you use the property for personal enjoyment while it remains an SMSF asset, it violates this test and could lead to penalties. - In house asset rules
The ATO limits the amount of in house assets (assets used by members or related parties) to 5% of the total fund value. This restriction is crucial when considering living arrangements in an SMSF property. - Limited recourse borrowing arrangements (LRBA)
If your SMSF property is purchased using an LRBA, you cannot reside in it until the loan is repaid or the property is removed from the fund.
So yes – you can live in your SMSF property upon retirement, however certain steps must be followed.
1. IN SPECIE TRANSFER
An in-specie transfer allows you to transfer ownership of the property from your SMSF to yourself or other members.
This process involves:
- Market valuation
Obtain a current market valuation of the property to determine its value at the time of transfer. - Compliance with trust deed
Ensure that your SMSF Trust Deed permits such a transfer. - Tax implications
While in-specie transfers can help avoid immediate capital gains tax (CGT), they may incur stamp duty and other costs depending on state laws.
Once the transfer is complete, you can reside in the property as it is no longer classified as an SMSF asset.
2. PURCHASE FROM YOUR SMSF
Another option is for you and any relevant members to buy the property directly from your SMSF.
This method requires:
- Payment at market value
You must pay for the property based on its market value as determined by a professional valuation. - Asset liquidation
This transaction effectively converts an asset held within your superannuation into cash, allowing you to maintain your retirement savings.
Capital gains tax considerations
When it comes to capital gains tax (CGT), understanding when and how it applies is essential:
- During accumulation phase
If you sell the property while it remains within your SMSF during accumulation, any capital gains will be taxed at 15%. If held for more than 12 months, a one third discount may apply. - In pension phase
Once your SMSF enters pension phase and you have transferred or purchased the property out of the fund, any capital gains from selling that property are exempt from tax. This exemption applies provided that all rules are followed correctly.
Other considerations
- Impact on age pension eligibility
If you are eligible for the age pension, living in an SMSF property may affect your pension payments. The ATO considers both the value of your SMSF assets and any properties owned when assessing eligibility for government benefits. - Diversification strategy
Investing solely in one property can expose your retirement savings to high risks. A diversified investment strategy (spreading funds across various asset classes) can help mitigate risks and enhance long term returns. - Commercial property options
If you’re considering living arrangements post retirement, don’t limit yourself to residential properties. Commercial properties offer more flexible rules regarding personal use without violating
superannuation regulations. However, market rent must still be paid if residing in commercial premises.
Sounds weird doesn’t it?
Who lives in a commercial property in retirement?
An example of someone residing in a commercial property owned by their self managed superannuation fund (SMSF) could be a retiree who has converted a portion of their SMSF assets into a commercial office space.
Example scenario – Chris’s office space
Background
Chris, a 65 year old retiree, previously operated a successful consulting business from an office building purchased through his SMSF. After retiring, Chris decided to continue using the office space for personal projects and occasional consulting work.
Property ownership
The office building is classified as ‘business real property’. This allows Chris to reside in it without breaching superannuation regulations. This classification is essential because it provides more flexibility compared to residential properties.
Market rent
Although Chris can live and work in the office space, rent to the SMSF must be at market rates. This ensures compliance with the sole purpose test that mandates the SMSF is maintained solely for providing retirement benefits.
Financial considerations
By living in the commercial property, Chris avoids the costs associated with renting or purchasing another residence. Additionally, since the property is owned by the SMSF, any income generated from subleasing part of the office space can contribute to retirement savings.
This scenario illustrates how retirees can leverage commercial properties within their SMSF to create a functional living and working environment while adhering to regulatory requirements.
Seeking professional advice
As always, professional advice is invaluable when making such significant financial decisions.
Given the complexities involved with SMSFs and property ownership, consulting with qualified financial advisors and tax professionals is crucial.
Our team of professionals can provide guidance tailored to your situation and help you to effectively navigate through regulatory requirements.