Should You Be Buying Property with SMSF?
The golden rule when it comes to buying property with SMSFs is that it needs to solely support your retirement benefits.
A lot of SMSF members are buying property with their SMSFs. But the question is, should you be? Unfortunately, the answer is not a straightforward yes or no.
It all depends on what your objectives are. For example, if you want to invest in residential property that can generate rental income, they say it might be a good idea. But if you’re looking for capital growth or planning to live in the property yourself, then it may not be considered appropriate.
So, before you jump into this decision, take some time to weigh up your options first.
Here’s what you need to know about buying property with SMSF.
What Is a Self-Managed Superannuation Fund (SMSF)?
To start, you’ll need to understand what a self-managed super fund is and how buying property with SMSF works.
An SMSF is a private superannuation fund that the members manage themselves rather than having the superannuation fund providers manage on their behalf.
So, you can make decisions about:
- your retirement savings,
- what investments you put your money into,
- and how much risk you’re willing to take on.
However, along with flexibility and control comes responsibility. Your investments must be made for the benefit of each member and must follow strict superannuation rule guidelines.
To find out more about these guidelines, make sure to check out these five self-managed super funds property rules that you need to know before opting for this investment strategy.
What Factors Should You Be Considering Before Buying Property with SMSF?
To comply with these strict guidelines, a residential investment property:
- must satisfy the “sole purpose test” and must be set up for solely providing retirement benefits,
- can’t be purchased from any fund members or member relatives,
- can only be an investment, not the primary place of residence for fund members or related parties, and
- can’t be rented by any of the fund members or related parties.
Peter and John are members of an SMSF and are looking to invest in residential property in the city.
John’s father, Mike, who isn’t a member of the SMSF, is currently selling his holiday home on the Gold Coast. So, both Peter and John considered buying the property from Mike because it’s in a sought-after area.
However, on inspection of the SMSF guideline, they realised that they couldn’t buy property from Mike because they would violate the compliance rules.
Similarly, if they end up purchasing a different property on the Gold Coast, they can’t live in it, rent it or rent it out to Mike because that would also violate compliance rules.
On the other hand, compliance rules still apply when it comes to commercial property, but they’re slightly more flexible. A commercial property investment must still satisfy the sole purpose test, but the related-party acquisition and rental rules are less strict.
Your SMSF is allowed to purchase commercial property business premises from which you can conduct your business operations from.
If Mike and John ran a family business together and were shopping around for a commercial property investment, they could consider buying their business premises.
This way, the rental payments that they make will go straight into John’s SMSF, provided that the rental payments are in line with the market value.
Can Your SMSF Afford to Buy Property?
According to the regulators, Your super fund needs to have a balance of at least $200,000 to $500,000 before even considering setting up a Self Managed Super Fund to make it economically viable.
While your SMSF can borrow money to buy investments through establishing a limited recourse borrowing arrangement (LRBA), SMSF property loans tend to be harder to come by because lenders are generally more reluctant to lend money to an SMSF because the purpose of super funds is to save, not create more debt.
So, for an SMSF loan, you’ll most likely need to provide a 40% deposit (in other words, the lender will only fund 60% of the property’s value), and your SMSF will need a balance of at least $200,000 in addition to contributions to cover deposit, other expenses and the loan repayments if the rent is not enough.
To learn more about the limited recourse borrowing arrangement, check out our essential guide to self-managed super fund property investment.
Are There Tax Benefits You Should Consider?
Many SMSF members end up purchasing property with their SMSF because of the many tax benefits available:
For example, you’re only required to pay 15% income tax on the net rental income from your SMSF property. So, if you personally fall into a higher income tax bracket, then buying property with SMSF could make sense from a long term tax perspective.
Other tax concessions offered by the Australian Taxation Office (ATO) include:
- Investment properties held in the super fund for longer than 12 months qualify for a capital gains tax (CGT) discount on SMSF property sales, and your capital gains tax liability will only be 10%.
- Rental income that the fund receives once you’ve reached the pension stage and can access your retirement savings is tax-free – so eventually, future income will be tax-free.
- Interest on the SMSF investment property loan is tax-deductible.
The sole purpose of an SMSF is to build up a portfolio of assets that will support your lifestyle throughout your retirement.
So, when you’re considering buying property with an SMSF, your primary decision-making factor should be to take that into account. In other words, “will this investment benefit my retirement?”
The tax benefits are fantastic, but it shouldn’t be the only reason why you end up buying property with SMSF.
Beyond that, you need to recognise the SMSF compliance laws and ensure your fund has enough liquidity and cash flow to meet the home loan repayments if you decide to borrow money and the ongoing property management fees.
Many factors will influence whether you should be buying property with SMSF, and it’ll all be dependent on your personal circumstances. So, you’ll need to seek professional advice to help you weigh up the pros and cons.
If you decide to go the SMSF investment property route, we also suggest that you consult a tax specialist to help you make the most of those tax benefits available to you.
Our team at Property Tax Specialists will get to know you and develop strategies that consider all aspects of your business, investments, income, family, and lifestyle goals.
Our emphasis is on protecting assets and taking advantage of all opportunities to minimise tax within legal constraints. We provide simple explanations and solutions, so you’re always fully informed of your investment choices.
So, to discuss any matter relating to self-managed super fund properties and arrange your affairs for minimum tax, get in touch today.
“This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.”
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002