Can I live in the property owned by my Self-Managed Superannuation Fund?

A common reason for people to commence an SMSF is that it allows them to use funds already saved to acquire direct property.  SMSFs can use a limited recourse borrowing arrangement to fund the purchase of a property while using existing superannuation funds as a deposit.

With an increased interest in SMSF property ownership, a question that pops up quite often is if the SMSF members, or their family, can live in their SMSF-owned property.

In almost all cases, the answer would be no.

Superannuation rules on the use of SMSF assets

The personal use of SMSF assets is prohibited and there are quite severe penalties that can be imposed on the fund trustees where they allow this to take place.

The most obvious issue relates to the sole purpose test, which requires that all SMSF assets are purchased and held for the sole purpose of providing retirement benefits to the members of the fund.

This requires the trustees of the fund to make decisions that are in the best ‘retirement interests’ of their members, not their current interests, or the interest of the fund’s related parties.

Allowing a member of the fund, or any of their relatives, to live in a property owned by their SMSF would be in breach of the sole purpose test.

Rare situations when it may be allowed

There are some situations where an exception to these rules could apply that would allow related-party use of an SMSF property for residential purposes. These situations would include:

1. 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 parties ‘residential use’ of the asset would be incidental to the business being carried on.

2. Primary production business

Where primary production land 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 that area of the overall primary production land that is used for residential purposes is 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.

How can the members use the property for personal use?

Depending on the age of the members of the SMSF, there are two possible ways that the members of the fund can personally use the property held in the SMSF and both options require the property to be transferred out of the SMSF:

1. Sell the property to themselves for market consideration under a sale contract. That is, the members will need to pay market consideration for the property into the SMSF bank account and have the title transferred to themselves personally.  This transaction must occur on an arm’s length basis.

2. If the members satisfy a condition of release, the property could be transferred out in specie at market value to the members which would reduce their member balance in the SMSF.

Once the transfer is complete and the property is owned personally by the member, then the property could be used for any purpose that the member wishes.

Summary

If you own property through your SMSF, then make sure you adhere to the applicable investment restrictions.

If you are looking to transfer the asset out of the fund as part of a member benefit, or sell the asset to a related party, then this would need to take place at market value on arm’s-length terms.

It would also be prudent to seek advice on any tax or stamp duty outcomes that may apply should you be looking to transfer or sell the fund’s property assets.