How Ultimately to Live in Your SMSF Property

A typical question among many Australians is how to live in an SMSF property after retirement. For that to happen, you must consider several rules and regulations that are allowed for commercial and residential property owned through your self-managed super fund (SMSF). 

The government forbids self-managed super fund members and their families from using SMSF-owned property for pleasure or enjoyment while the fund is still active. Finance experts refer to that scenario as an in-house investment. Laws limit the total amount invested in a self-managed super fund to a maximum of 5%. 

You also cannot settle in your property if it’s under a Limited Recourse Borrowing Agreement (LBRA) or SMSF loan. Breaking the rules could result in a severe penalty for living in a SMSF property. 

However, living in an SMSF property once you’ve retired becomes more feasible.  In this blog, we will explore how ultimately to live in your SMSF property.

Can I live in my SMSF property when I retire?

Yes, you can reside in an SMSF property when you retire. However, you must meet several conditions from the Australian Tax Office (ATO), specifically an in-specie transfer and the sole purpose test.

What is an in-specie transfer?

An in-specie or market transfer is obtaining an asset in its current form instead of cash so the government can transfer the self-managed super fund property under your name. You can also use the property for personal reasons after the in-specie transfer. The process also assures you will not receive any financial benefit from an asset of your SMSF.

An in-specie transfer allows you to enjoy retirement by settling in a property the SMSF previously owned. It also enables you to avoid various taxes such as tax duty. 

In-specie transfers are a standard method of moving assets between various self-managed super funds. Assets outside of super funds benefit from in-specie transfers because the process doesn’t involve capital gains tax (CGT). 

However, legal and beneficial ownership change when an in-specie transfer is performed within a super account. Consequently, superannuation and CGT rules will apply when you sell the property. You can avail of certain exemptions and concessions for self-managed super funds. Consult an established tax professional so you can minimise your tax obligations.   

Disadvantages of in-specie transfers include navigating complicated regulatory requirements and steep costs, including stamp duty, legal fees, and possible capital gains tax. 

The requirements for transferring into an SMSF include:

• Additional Lump Sum Contribution Form
• Standard Transfer Form
• Pension Application Form (for applicants transferring into a pension account)

You can only avail of an in-specie transfer upon your condition of release when you reach retirement age or terminate gainful employment after you turn 60. 

Ensure you can do an in-specie transfer at market value and retain sufficient membership entitlements in the fund equivalent to the asset’s value. 

Living in SMSF property after retirement for individuals eligible for age pension involves several conditions because it can affect pension eligibility and payments. The government may consider SMSF asset value and property in the assets test of the pension application. These factors could affect the pension these individuals will receive.

What is the sole purpose test?

Another requirement for living in SMSF property after retirement is the sole purpose test, which ensures your superannuation fund offers retirement privileges to members. Alternatively, the fund can benefit a member’s dependents or relatives if he passes away before retirement age. 

Receiving a financial benefit for making investment decisions will disqualify applicants from the sole purpose test. The Australian government has strict policies about a super fund’s investment options. 

If the fund produces benefits before you retire or the government discovers you used the fund assets for personal gain, you won’t qualify for the sole purpose test. Penalties for breaking the law include disqualification, fines, and imprisonment.  

Your situation could become complicated if your self-managed super fund has members other than yourself and your spouse. For example, doing an in-specie transfer under your name with four individuals in your SMSF might not meet the sole purpose test requirement of offering benefits to members. 

What are other factors when handling SMSF property?

A diversified self-managed super fund investment strategy includes cash, fixed income, stocks, and property to minimise risk and maximise long-term returns. Regardless of your financial goals, risk aversions, and investment timespan, diversification will help you live comfortably when you reach retirement age. 

Don’t limit yourself to residential SMSF property options. You can also settle in SMSF commercial property after you retire. Under the ATO’s definition, “business real property” pertains to lands and buildings utilised exclusively in at least one business.  

Business real SMSF property rules are more flexible than their residential counterparts. If you decide to reside in the former option, the government doesn’t require a condition of release for SMSF members to use it. Nevertheless, you must still pay the fund’s  property rent at market rates. Examples include residing in a property designated for industrial use and investing in retail or office space.  

How ultimately to live in your SMSF property comes down to three factors: 

Investment strategy: The Australian Taxation Office (ATO) urges investors to diversify their assets to manage risks effectively. Focusing too much on one investment, such as stocks, may hinder your long-term financial goals when you retire. 

You must carefully evaluate the benefits and drawbacks of stashing your retirement funds in a solitary SMSF investment property. Is this approach consistent with your investment strategy and risk tolerance? Alternatively, purchase the property earlier as one element of a diverse SMSF portfolio. 

Financing: Receiving a home loan via your SMSF means following the ATO’s strict borrowing guidelines for investment property loans. 

For instance, a Limited Recourse Borrowing Arrangement (LBRA) requires a separate holding trust to purchase an SMSF property. If the property incurs a liability, it won’t affect your other investments. 

Taking the LBRA route usually requires a high deposit rate ranging from 20% to 30%. Some SMSF lenders charge more exorbitant fees. It’s imperative to receive early and quality financial advice from qualified tax professionals to avoid this scenario. 

Tax repercussions: Living in SMSF property after retirement exempts income or capital gains from taxes in the context of superannuation. Unfortunately, the Australian government will reprimand you severely for disobeying its strict taxation laws when your property was a fund investment. 

Qualified tax professionals can help you calculate expenses to claim the pertinent deductions. They can also help prevent unforeseen SMSF taxes that impede your retirement goals. 

Should you put your SMSF property on the market?

If you plan to sell your SMSF property, consider its market value and costs. Selling your property will help pay a significant amount of your retirement expenses. The proceeds will allow you to re-invest and minimise your overall tax.  

You can withdraw funds from your self-managed super fund and stash them in a bank account to pay off a new property when you reach the retirement age of 60. Your new property can help generate passive income while you enjoy your retirement years. 

Can I use my SMSF property for personal reasons if I return to the workforce?

You can use your SMSF property for personal reasons after you reach preservation age and retire, turn 60 and retire, and turn 65. The Australian government allows access to 65-year-olds’ superannuation even if they’re still working. 

Some individuals struggle filling their spare time during retirement so they decide to return to the workforce. However, they must prove to the ATO their intention of leaving the workforce was genuine and authentic at the time they originally retired. The ATO and the super fund auditor usually require a letter from the employer and a statutory declaration from the individual who wishes to work again as evidence.   

Seek professional advice

Qualified tax professionals can advise you on how ultimately to live in your SMSF property. Although settling in an SMSF property seems enticing, it’s a complicated matter—you must navigate through various rules and regulations to achieve this goal. You must ensure you comply with the sole purpose test and other requirements. 

You should also look at the long-term picture—will living in an SMSF property after retirement affect your pension privileges and estate planning? Try weighing the pros and cons before you make your decision. 

Regardless of your preference, living in an SMSF property after retirement is complicated. Laws can change at any moment. Seek the advice of reputable self-managed super fund and financial planning professionals who can guide you. 

If you need assistance with how ultimately to live in your SMSF property, contact our Gold Coast SMSF accountants at TW Accounting today.