Q: We have a real estate property in our SMSF that is rented out and passes the sole purpose test. Our fund is only two members, my wife and I. When we retire, does an asset like this need to be liquidated, or could the members take possession of the property?
A: This is a very commonly asked question and I’m going to make a couple of comments first. What I mean by that is, is there a reason why you want the property outside of the fund? Let’s start at the beginning and say that there’s absolutely nothing within the super rules that will require you to sell, liquidate, get rid of the property just because you’re moving into pension phase. Just because you retire doesn’t mean you need to make changes to the assets that are held within the fund.
Now, of course, the returns that we get on assets, including property, so the rent, that needs to be sufficient to pay our pension requirements weekly, or monthly, or fortnightly, or annually, or whatever it is that you pay. So, cash flow and liquidity becomes very important, particularly with SMSFs that have property, indivisible assets property. We can’t just sell a roof or a room. We sell the whole thing or we don’t. So, first point, absolutely nothing that will require you to make changes just because you’re moving your pension phase.
But just as important is that all of those usual rules and restrictions that we have with super, continue to apply no matter if you’re in pension phase or not. Why I raise that is if you or your wife or your family or your kids or whoever want to stay in that property or use that property or holiday in that property or live in that property, stay overnight, whatever, it cannot be an asset still owned by your SMSF. So, if nothing’s changing from what it was from accumulation to retirement phase, then no changes do need to occur.
But what I’m looking at here is I’m going to make the assumption that you want to keep the property and live in it, or make use of the property for holidays, all those sorts of things. Then in those cases, then that asset, that property has to be removed from the SMSF. Whilst it’s an asset of the fund, you or your family members, you are not allowed to stay there, even if you pay market rate rents. It’s a general position around using the fund assets. The way that you could look at this is the members could purchase the property from the SMSF at market value. So, I would go physically and get independent market values for the asset. I would use that and I would then pay the fund for the asset.
The other way is if the SMSF trust deed allows, you could transfer the property out of the SMSF trustee’s name into your name’s personally as an in-specie payment, a member benefit payment, and then it’s no longer an SMSF asset, you can do what you want with it. What’s the better approach?
Well, it depends, of course, on circumstances. Where you can afford to buy the property off the SMSF, what you’re doing, of course, is not depleting all your retirement savings. You’re moving that cash back into the fund. You’re allowed to acquire those assets from the fund at market value. So, you’ve swapped an asset of property with cash. The strict rules around SMSF’s buying assets from a related party don’t work the other way. SMSFs can sell assets to related parties as long as it’s done at market value.
So, to wrap that one up, nothing has to change unless the use of the property is going to change and you’re going to stay in the asset, then you would need to make those changes as we discussed. There is a pretty good SMSF and property guide for you on the website. Have a look there. It’s a fairly good decent coverage of all the different issues around SMSFs and property.