Living in a Property Owned by Your SMSF: The Legalities and Risks

Investing in real estate through a self-managed superannuation fund can offer several benefits including tax advantages, potential for greater income and capital growth, and faster retirement savings. However, it’s essential to consider the legal obligations and risks involved in this investment.

One question often asked by clients is whether they can live in a property owned by their SMSF. The answer is no, generally speaking. This is due to the “sole purpose test,” which is designed to ensure that the superannuation is maintained solely for providing retirement benefits to the members or their dependants. If the SMSF trustees purchase a property to reside in, it fails the sole purpose test.

Other scenarios that breach the sole purpose test include purchasing a property to help a financially troubled friend or relative, which is not in line with maximizing retirement savings. To determine whether your investment meets the sole purpose test, consider whether it will provide financial benefits to you or related parties besides increasing the return for your SMSF.

Breaching the sole purpose test can result in significant consequences, such as loss of tax benefits, dismissal of trustees, and possible civil and criminal penalties.

Renting a residential property owned by the SMSF to a relative is also generally not allowed, but there is a provision for in-house assets, though it is complicated. Renting out a commercial property, however, is allowed as long as it is used for business activities, the lease is at market rate, and the rent paid goes directly to the SMSF and not your personal funds.

When making investment decisions, it is important to ensure they align with your investment strategy and meet the sole purpose test. Always consider whether the investment or arrangement will provide benefits to the members of the SMSF.

In conclusion, investing in real estate through a self-managed superannuation fund has its advantages, but it also requires careful consideration of the legal obligations and rules in place to protect your financial and retirement savings.