Can I live or stay in my SMSF property?

The super rules require all assets held in an SMSF are for the sole purpose of providing retirement benefits to the fund members.

Any current-day benefit or use of an SMSF-owned asset would, in most cases, be in breach of these rules.

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If you own residential property through your SMSF, neither you, your relatives, your related parties or your ‘Part 8 Associates’ can live in that property.

The in-house asset rules could also be an issue for most SMSF trustees as these rules apply a maximum limit of 5% on the total fund assets that can be leased to a related party of the fund.

Keep in mind that even if the value of the residential property leased to a related party is within the 5% limit, the sole purpose test would still NOT ALLOW the lease to take place.

What about a casual stay?

The restriction on the personal use of your SMSF assets extends to any casual stay at your fund-owned property.

Under the super rules, any personal use of your SMSF-owned residential property, whether that be for one night or a week, can create a compliance concern that will often lead to breaches of the rules.

So that weekend away to stay at the Gold Coast unit owned by your SMSF is off the table!

The risk of fines, disqualification from being an SMSF trustee or even jail time should be enough of a deterrent to anyone who asks, “Who is going to know if I stay there or not?”.

Rare situations when it may be allowed

In rare situations, an exception to these rules could apply that would allow related-party use of an SMSF property for residential purposes. These situations include:

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A hotel or motel business

Where the property is owned by the SMSF and a related party is actively managing the hotel or motel business and is required to always be available, so they live on site.

The related party’s ‘residential use’ of the asset would be incidental to the business being carried on.

Primary production business

Where farmland is owned by an SMSF and is used in a primary production business, there can be residential use of a house on that land so long as it occupies no more than two hectares (including the house and surrounds).

Again, the residential use of the asset would need to be incidental to the business being carried on.

What if I’m already retired?

The personal use restriction continues to apply even into retirement. So, if you want to use the property for personal use, such as holidays or to live in, then you will need to remove the property from your SMSF.

This could be achieved by:

1. Purchasing the property from your SMSF (trustee), at market value, resulting in a change in ownership from the SMSF to you personally, or into another entity.
2. Transferring the property from your SMSF to you personally as a member benefit. This would essentially be an in-specie member payment. Again, this would mean that the SMSF (trustee) is no longer the owner of the asset.

It is important to consider transaction costs such as legal fees, capital gains tax and stamp duty. These expenses and costs will vary depending on which state (or territory) the property is located and whether your SMSF is in full retirement phase.

Common questions about living in SMSF properties

Can you live in a property owned by an SMSF when you retire?

The short answer is no, not while the property remains an asset of the self-managed super fund.

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Retirement is a long way off

I’m planning my retirement (or want to get started)

I’ve already retired

None of the above

There are two main rules that apply in these situations:

1. The sole purpose test: This requires that all activities carried out by the fund (trustees) are for the sole purpose of providing retirement benefits to the fund members; that the fund assets and resources should not be used to provide a pre-retirement benefit to the members of the fund or their related parties.
2. The in-house assets test: This test applies a 5% limit on all in-house assets held in an SMSF. In-house assets include assets owned by an SMSF that are leased to a related party unless an exception applies.

Living in a property owned by your SMSF would be in breach of the sole purpose test and would, in most cases, exceed the in-house limits.

However, if the property is removed from the SMSF and therefore no longer an asset of the fund, you could then live in the property.

This could be achieved by either buying the property from the SMSF (at market value) or by transferring the property out of the fund as a member benefit payment at a time when you are allowed to access your super benefits, for instance when you are retired.

Can you rent an SMSF property to your children to live in, where they pay the market rate rent for the property?

The same two issues that were covered in the previous question would apply here, being the sole purpose test and the in-house assets test.

There would be an issue with the sole purpose test.

Also, if you consider how the in-house assets test operates, it would be extremely rare for the 5% limit to be satisfied, as the market value of the property needs to be used in the calculation of the in-house assets test limits.

For example, a property with a market value of $800,000 would only comply with the 5% in-house assets limit if total SMSF assets were above $16 million.

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It’s important to note that where the value of a fund’s in-house assets exceeds 5% at the end of the financial year, the fund trustees would be required to put in place a written plan to DISPOSE OF (sell) one or more of the fund’s in-house assets to get back below the 5% level. 

Merely kicking the kids out of the property would not work, as the legislation requires the sale of an in-house asset. 

So, renting an SMSF-owned residential property to a related party could result in the need for the SMSF to sell the property the following financial year.

The bottom line

There is no doubt that the popularity of property investing within SMSFs will continue. This will be driven by potential tax benefits and the perceived stability of bricks-and-mortar assets.

However, trustees also need to carefully consider the regulatory restrictions that apply to this asset class and understand how these rules apply if, and when, they wish to make use of any fund-owned asset.

If you own property through your SMSF, make sure you comply with the applicable investment restrictions.