Beware of using SMSFs to fund retirement property purchases

By Reporter

February 10 2020
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SMSF trustees hoping to use their self-managed fund to finance retirement plans such as running holiday accommodation are likely to run into compliance problems that make such plans largely impossible, according to a leading SMSF law firm.

Beware of using SMSFs to fund retirement property purchases

In a recent blog post, Townsends Business and Corporate Lawyers’ Elizabeth Wang said while it was possible for SMSF trustees to run a business through their fund, super laws largely prohibited the business being used as a lifestyle asset.

“SMSFs can run a business, but the rules around the operation are so strict that often it is not possible to comply with them, or compliance makes the trustee’s plans impossible to put into effect,” Ms Wang said.

She gave the example of Robert and Mary, who wanted to use their SMSF to buy a Hunter Valley property using an LRBA that they planned to run as a bed and breakfast.

“They want to run a B&B out of the property as a way of generating income for the SMSF as they plan to retire in the next 10 years,” Ms Wang explained.

“Before Robert and Mary jump the gun by putting down a deposit on the property, there are a couple of things they need to consider to ensure that the transaction complies with super laws.”

Ms Wang said the first thing to consider was the sole purpose test, which Robert and Mary could not pass unless they contracted a third party to run their B&B for them.

“They may have difficulty satisfying the sole purpose test if they intend to reside in the B&B in order to operate and manage the business. Their fund can’t provide them with accommodation in this way, even if it is associated with running the business from the property,” Ms Wang said.

“A further problem arises if they intend to take a wage as employees because an SMSF cannot directly or indirectly provide financial assistance or benefits to its members prior to their retirement, including use of or access to the assets of the SMSF, as this would most likely breach the sole purpose test.”

Secondly, Robert and Mary would need to have a sound investment strategy setting out why purchasing such a property made sense for their SMSF, she said.

“Robert and Mary would need to ensure that acquiring the property and running it as a B&B would be a prudent investment, especially as they are approaching retirement age, where stable income-generating assets and minimal risk of significant capital loss are important,” Ms Wang said.

Given they wanted to use an LRBA to purchase the property, Robert and Mary would also need to ensure their trust deed allowed borrowing and amend the terms of the deed if necessary, she added.

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Retirement