Gearing being available as it is to them, SMSFs find it easy to lap up residential properties. This fact did not find favour with former Prime Minister Paul Keating. If his wishes were to be kept in mind, we would have had SMSFs barred from investing in residential real estate.
3.5% SMSF investments in residential real estate
While 12% of SMSF assets comprise of commercial properties, only about 3.5% are invested in residences. This shall partially allay the fears of our former PM. This said, the number of investors seeking Limited Recourse Borrowing Arrangement through their SMSF have increased almost 18 times over the last 5 years or so.
Issues with SMSF-enabled real estate investments
Everything is not as easy as it sounds though and if you make an unwise investment in properties through your SMSF, you may well live to rue that decision later (and with quite a fast response time, too). Let us say your purchase is non-compliant with the ATO rulebook. In such cases, the concessional tax status is taken away from you and you are levied tax at the marginal rate. This apart, you also have to face the brunt of ATO penalties; and they are not like what they used to be before 1st July 2014.
Let us assume a different case where your SMSF has bought property from a related party. In such an event, you can be brought to the book if you bypass what the arm’s length transaction guide has to say. Of course, you need to also keep in mind all the guidelines associated with commercial transactions because you can only buy business real property from related parties.
I have seen buyers purchasing through their SMSF from related entities which happen to be unit trusts. Nothing wrong you would say? Except that the trusts weren’t even established before the property was purchased. Now how about that?