In the end it all boils down to two key rules as set by the Australian Tax Office (ATO) - the sole purpose test, and the at arm’s length test. These basically eliminate you living in the property while it’s held in the SMSF before preservation age.
You might already know you cannot use an SMSF-owned property for personal enjoyment or provide it as accommodation for family members or friends while the fund is active and you are in the accumulation phase. However, when you retire, and/or reach the preservation age of 60 and unwind your super fund, is when things get different.
This also hinges on the fact your SMSF (ergo, you) own the property outright - it is not under finance or encumbered with a Limited Recourse Borrowing Arrangement, otherwise known as an SMSF loan. If there’s still a loan attached to the property, the answer is a hard no.
Sound convoluted? You’d be right.
How to live in your SMSF property when you retire
There is one main option when looking to live in your SMSF property when you retire, or reach preservation age, which is typically 60. It’s called an in-specie transfer.
You will need to make sure the trust deed allows for an in-specie transfer, and that it is transferred at market value. To the latter point, you will need to make sure you have enough member entitlements in the fund equal to the value of the asset.
The main benefit of an in-specie transfer is that you might be able to avoid stamp duty and other taxes, unlike traditional methods of property transfers and purchases.
You might also trigger a capital gains tax (CGT) event. However if the property was a sole asset supporting one or more members' pensions you might be able to avoid CGT.
After you have satisfied SMSF rules and done an in-specie transfer, you will still probably have tenants to consider.
Living in your SMSF property in retirement: What to keep in mind
The question of whether you can live in an SMSF-owned property when you retire is a common one, and the answer is not a simple yes or no. Several important considerations and rules come into play.
Sole Purpose Test
The ATO mandates that SMSFs must satisfy the "sole purpose test." This means that the primary purpose of the fund must be to provide retirement benefits to its members. While the sole purpose test doesn't explicitly prohibit members from living in an SMSF-owned property, it does require that any such arrangement is consistent with providing retirement benefits.
This could get trickier if your SMSF has more members than just you and your spouse. If you in-specie transferred a property to your name with four other members in the SMSF, this might not satisfy the sole purpose test of providing benefits to members - and would probably raise a few eyebrows at the least.
Age Pension Considerations
If you're eligible for the Age Pension, living in an SMSF-owned property can impact your pension eligibility and payments. The value of your SMSF assets, including the property, may be included in the assets test for the Age Pension, potentially affecting the amount of pension you receive.
Capital Gains Tax (CGT)
Another consideration when living in an SMSF-owned property is the capital gains tax. When the property is sold, whether it's during your retirement or after, capital gains tax may apply. However, there are certain exemptions and concessions available for SMSFs, and it's crucial to seek advice from a tax professional to minimise your tax liability.
Downsizer contribution rules
If you are looking to contribute cash back into the fund from selling your home, keep in mind the downsizer contribution rules. As of 2023 the maximum contribution is $300,000, and the minimum age is 55.
LRBA and SMSF loans
|FEATUREDINCLUDES NOV RBA RATE INCREASE|| |
loans.com.au – SMSF 70
loans.com.au – SMSF 70
Firstmac – SMSF 70 (Refinance Special)
Liberty Financial – Liberty Residential SMSF (LVR < 80%)
La Trobe Financial – SMSF Residential
|INCLUDES NOV RBA RATE INCREASE|
loans.com.au – SMSF 80
Firstmac – SMSF 80 (Refinance Special)
Seeking Professional Advice
Living in an SMSF-owned property when you retire is possible, but it comes with specific rules and considerations. It's essential to understand and adhere to the regulations set by the ATO to ensure that your SMSF remains compliant with the sole purpose test and other requirements.
Additionally, you should carefully evaluate how this decision fits into your overall retirement strategy, including its impact on your Age Pension entitlements and estate planning.
The rules and regulations governing SMSFs and property ownership are complex and subject to change. To ensure that you make informed decisions that comply with the law, it's advisable to seek advice from professionals who specialise in SMSF and financial planning. A qualified financial advisor or tax expert can help you navigate the intricacies of SMSF property ownership, rent payments, and retirement planning.
Photo by the Centre for Ageing Better