One of the key advantages of a Self-Managed Super Fund (SMSF) is the ability to invest in property, potentially growing your retirement savings through capital gains and rental income. However, if you’re thinking about living in your SMSF property when you retire, you need to be aware of the strict regulations surrounding this issue.
While you may dream of retiring in a property you own within your SMSF, there are rules that govern the use of SMSF property, even once you’ve reached retirement age. In this blog, we’ll explain the conditions under which you can and cannot live in an SMSF property after you retire, as well as the penalties you might face for breaching these rules.
Can I Live in My SMSF Property When I Retire?
In general, the answer is no, you cannot live in your SMSF property while it’s still held within the SMSF. This rule applies even after you retire, as SMSF properties cannot be used for personal residential use by members or related parties (including family members) at any time.
However, there are some important nuances to consider, and we’ll explain the exceptions and conditions under which you might eventually be able to live in the property.
Why Can’t You Live in Your SMSF Property?
The sole purpose test is the cornerstone of superannuation law, and it’s one of the key reasons why personal use of SMSF property is restricted. This test ensures that the assets held within an SMSF are used exclusively for the purpose of providing retirement benefits to the fund members.
If you live in your SMSF property before or after retirement, it could be considered a personal benefit, which violates the sole purpose test. This could result in the fund losing its compliant status, which in turn means the loss of the concessional tax benefits that come with SMSFs, such as the 15% tax on income generated by the fund and the 10% capital gains tax on long-term investments.
To avoid breaching the regulations, it’s essential that any SMSF property remains strictly for investment purposes only and not for personal enjoyment or residential use.
When Can You Live in Your SMSF Property?
So, if you can’t live in your SMSF property during your working years, is there ever a time when you can? The short answer is yes, but with certain conditions. Here’s when it may be possible to live in the property:
1. After You Sell the Property and Remove It from the SMSF
Once you reach retirement age and begin drawing from your SMSF, you can sell the SMSF property and take it out of the fund. Once the property is no longer held by the SMSF, you are free to use it for personal purposes, including living in it. However, this requires the property to be sold, as the property itself cannot be used by you while it’s held within the SMSF.
It’s important to note that any proceeds from the sale of the SMSF property would need to be processed and included in your SMSF’s retirement benefits. You can then use the funds to support your retirement, but living in the property directly is not allowed until the sale is completed.
2. Living in a Property After Transitioning It to a Pension Phase
If your SMSF owns a property and you transition into pension phase (when you begin drawing a pension from the SMSF), the property can still remain in the SMSF, but you cannot live in it. However, once you’ve sold the property or taken it out of the SMSF, you can use it as your primary residence.
The key is that the property must be sold and no longer be part of the SMSF for you to live in it. The moment you transfer the property into your own name outside the SMSF structure, it is no longer subject to superannuation rules.
3. Using the Property for Business Purposes
In some cases, if the property is a commercial property, you may be able to lease it to your own business, provided the lease is structured at market rates and meets the legal requirements of the SMSF. However, this does not apply if you intend to live in the property for residential purposes, as residential use is strictly prohibited.
If the property is used for business purposes, you can lease it to your business, but it cannot be used as a place for personal residential living. Once you retire, the property can still be leased to your business under the terms of your SMSF’s rules, but you cannot convert it into a residence for yourself.
Potential Penalties for Living in Your SMSF Property
If you violate the rules around SMSF property use and decide to live in the property while it’s still part of the fund, you risk significant penalties, including:
1. Disqualification of the SMSF
If you use your SMSF property for personal purposes or residential use, the ATO may disqualify your fund. This means that the fund would lose its compliant status and the tax concessions associated with it. This could result in higher tax rates, including:
- Loss of concessional tax rates: Your SMSF could lose the benefit of paying tax at the concessional rate of 15% on income generated by the fund. The tax rate could rise to as high as 45%.
- Repayment of tax benefits: The ATO may require you to repay any tax benefits your SMSF received during the period of non-compliance.
2. Non-Arm’s Length Income (NALI)
If you rent the SMSF property to yourself or family members at a reduced rent, the ATO may classify the income from the property as non-arm’s length income (NALI). This means the income will be taxed at the highest rate of 45% instead of the standard 15% tax rate for SMSFs.
3. Penalties for Trustees
Trustees are responsible for ensuring that the SMSF complies with all regulations. If you, as a trustee, use the SMSF property for personal purposes, you could face fines or be disqualified from managing the SMSF. The penalties for non-compliance can include:
- Fines: Trustees can be fined for failing to comply with SMSF laws. The fines can range from $1,000 to $220,000, depending on the severity of the breach.
- Loss of trustee status: In some cases, trustees may be banned from managing an SMSF in the future, which could significantly disrupt the management of your superannuation.
What Should You Do Instead?
If you are hoping to live in property owned by your SMSF, the best strategy is to ensure that it remains an investment asset until you are ready to retire. Once you retire, you can then sell the property or take it out of the SMSF to live in it.
If you want to benefit from the property while it is in the SMSF, consider leasing it out to third parties for rental income or using it for business purposes (if applicable).
Consulting with a financial advisor or SMSF specialist is always a good idea when planning property investments within your SMSF. They can help you understand the rules, make sure your SMSF is compliant, and guide you through the process of managing your superannuation effectively.
Conclusion
Can I live in my SMSF property when I retire? The answer is no—you cannot live in your SMSF property while it is held in the fund, even once you’ve retired. The property must remain strictly for investment purposes while part of the SMSF. However, once the property is sold or transferred out of the SMSF, you are free to use it as your residence.
Understanding the rules governing SMSF property use is essential to avoid penalties and ensure compliance with superannuation law. If you’re thinking about using SMSF property for personal purposes, it’s important to plan ahead, and seek advice from a financial advisor or SMSF expert.
At Sydney Finance, we can help you navigate the complex world of SMSFs and property investment. Whether you’re setting up an SMSF, managing your fund, or making property investments, we’re here to guide you every step of the way.
Ready to plan your SMSF property investment? Contact us today for expert advice and tailored solutions.
FAQs
- Can I live in my SMSF property once I retire?
No, you cannot live in your SMSF property while it’s part of the fund. You must sell or transfer the property out of the SMSF before using it for personal purposes. - What happens if I live in my SMSF property?
If you live in your SMSF property, your fund could be disqualified, and you may face penalties, including higher tax rates on the fund’s income. - Can I lease my SMSF property to my business?
Yes, you can lease a commercial property held in your SMSF to your business, but the lease must be at market rates and comply with SMSF rules. - What is the sole purpose test in SMSFs?
The sole purpose test requires that SMSF assets, including property, be used solely for the purpose of providing retirement benefits to the fund’s members. - Can I use my SMSF property after retirement?
Once you retire, you cannot live in the SMSF property unless it is sold or transferred out of the fund. However, you can still rent it out or use it for business purposes.