Some people are still having confusion about what property a SMSF can invest in and which are “no-go” zone.
Rule 1, SMSF can’t invest in
SMSF is prohibited from buying residential property from fund members or from people, companies or trust they are ‘associated’ with. Purchases must be made at arm’s length.
Two people would be deemed associated if they are related (e.g. family members such as brothers and sisters), or if they are involved in a business in a business together (in a partnership or on an employer/employee basis)
A person and a company would be associated if the person is a director of the company and is actively involved in the day-today operations of the company or if the person owns over 50% of the shares or has voting rights fro the company.
A person and a trust would be associated if the person is a beneficiary of the trust and the trust is a discretionary trust (such as a family trust) or if the person owns over 50% of the units or has voting rights fro a unit trust.
Rule 2, SMSF can invest in
SMSF can buy ‘business real property’ from anyone, including fund members or people, companies or trusts they are ‘associated’ with. They can also buy residential property owned by someone else who is not an ‘associate’. Purchases must be made at arm’s length.
Business real property
The property must be used wholly and solely for business purposes at the time of purchase. It can be a shop, factory, office or farmland. It can even be a house used for business purpose, such as a doctor’ surgery or an accountant’s office.
SMSF has to be make sure before transferring a shop, office, factory or farmland, there is a tenant running a business from that property, otherwise SMSF may fails the business real property test.
Residential property owned by someone else
SMSF can purchase residential property from people and entities where is no association.
Residential property investment can not be occupied by fund members or their family, irrespective of how much rent is paid. Fail to pass this rule is a serious beach of legislation and to comply with the ‘sole purpose test’.
If the main purpose of an investment property is to provide adult children or relative with a home, the SMSF will fail the sole purpose test.