A trustee can consider fractional property investment in their SMSF, which is similar to purchasing units in a managed property trust. Fractional investment offers an alternative to forking out big dollars to get into the housing market.
How it works –
Fractional investing, much like its name suggests, means investing in a smaller piece of a whole asset. The property is divided up into small shares and sold off to investors at a price that is affordable compared to the whole property.
These investors will then receive income via rent from the property and can also benefit from capital gains once it sells or they sell their shares. It is important to note though that all gains and returns will be proportional to the size of the share in the investment.
Fractional property investment is gaining traction across Australia and for good reason – it enables you to buy a portion of a property, so you get all of the benefits of owning a property (or part of it at least) without the upfront expense and the ongoing hassle of covering expenses. Think of it as property crowd-funding.
One of the biggest advantages of fractional investment is the low barrier to entry when compared to traditional property investment. Investors don’t need to save 10-20% of a property’s value as a deposit – they can own a share of a property for a very small initial outlay.
There are a number of options available for buying an investment property through factional ownership but it’s a good idea to do your research before jumping in. Some do offer relatively low risk options though because the amount you invest is low. Typically they generate a low level of ongoing income – they are primarily positioned for long-term capital growth.
Tax Office view –
The ATO has approved fractional investing for SMSF – but always with the Sole Purpose Test in mind (that super monies are used for the FUTURE benefit of members, not current benefit such as renting to themselves or relations). The ATO gave guidance following the 2018 Federal Court decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation  FCAFC 122External Link.
Specifically, the ATO is considering the sole purpose test implications of fractional property investments especially in relation to one particular company, and how it is dealt with.
The ATO has indicated it is open to fractional property investments being used within an SMSF, but product providers would need to seek approval from the regulator before going to market.
The SMSF regulator (ATO) made the comments as part of a statement titled “Guidance for SMSFs on fractional property investment”, in which it invited fractional investment product providers that were considering the sole purpose test implications of their products to speak with the ATO.
The other way AN SMSF can invest in property is place a deposit and borrow, (Limited Recourse Borrowing Arrangement – LRBA) but in 2019 the availability of lenders for this is limited, and much more restricted.
Want to learn about LRBA borrowing and how property works in SMSF? See our FREE slides SMSF & Property Overview
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