CURRENT AS AT 5 OCTOBER 2018
Buying residential property is not just about finding the right property even though this is often the most time-consuming part. Don’t fall into the trap of purchasing from a related party even if it’s at market value.
Take for instance the following case study:
Harry and Megan have their own SMSF, the Nottingham Super Fund which has a corporate trustee, of which they are both directors and members of the fund.
They have been looking to purchase an investment property in Sydney for the past 18 months but cannot afford the Californian bungalow property that is within 15kms of the CBD on their $1.8m budget, so have decided to put this on hold and look to purchase a residential unit that meets both the criteria.
However, all the properties they have seen in the past 6 months have been old and run down, so they would need to spend a sizable amount on renovations which they do not want to do.
Around the same time Harry’s brother, William was planning on selling one of his own investment properties so he could look to purchase a bigger house for his growing family. Harry wasn’t too keen on the idea and wanted to keep looking, however Megan was tired of property hunting every weekend and thought this was the perfect solution for everyone – they knew the property had been renovated in the past 12 months, was in the trendy part of Redfern so there would be no shortage of renters and they could save a significant amount of money on agent and marketing costs, being a private sale.
Can this be done?
No and this is why:
- the SMSF (as opposed to Harry and Megan personally) would be purchasing the property from William personally
- SMSFs have investment restrictions which prohibit them from purchasing residential properties from “related parties” and “relatives of members” of the fund
Who is defined as a “relative”?
A relative of a member includes:
- a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse
- a spouse of any individual specified above.
Who is defined as a “related party”?
- all members of your fund
- associates of fund members, which include:
- the relatives of each member
- the business partners of each member
- any spouse or child of those business partners
- any company the member or their associates control or influence
- any trust the member or their associates control.
It’s important to remember that SMSFs have strict investment rules so don’t get caught out by not doing your homework before making a decision.
Should you require assistance in understanding what your SMSF can invest in, please do not hesitate to contact us.
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