Should You Be Buying Property with SMSF?
The golden rule when it comes to buying SMSF property is that it needs to benefit your retirement solely.
A lot of SMSF members are buying SMSF property. 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 or capital growth, they say it might be a good idea. But if you’re looking for a property to rent to a family member or planning to live in the property yourself, then it would breach the SMSF rules.
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 Super Fund (SMSF)?
To start, you’ll need to understand what a self-managed super fund is and how buying SMSF property 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 direct property investments you put your money into
- How much risk you’re willing to take on
However, along with flexibility and control comes responsibility. Your investment strategy must ensure that all decisions are made for the benefit of each member and must follow strict superannuation rule guidelines.
Factor You Should Consider Before Buying an Investment 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
- Can’t be rented by any of the fund members or related parties
Example
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 themself 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 real estate, but they’re slightly more flexible. A commercial property investment strategy must still satisfy the sole purpose test, but the related-party acquisition and rental rules are less strict.
Self managed super funds are allowed to purchase commercial property business premises from which you can conduct your business operations from.
Example
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 a Residential 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 superannuation 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.
The primary reason is the limited recourse nature of the loan, which means the bank can only take back the property attached to the loan and nothing else. This restriction prevents banks from seizing any other property in the SMSF, making lenders generally more reluctant to provide such loans.
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 loan costs, property expenses and the loan repayments if the rent is not enough.
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 is 33.33% 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.
Key Takeaways
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 SMSF property, 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 your decision, 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.
FAQs
What Is the Main Advantage of Buying Property with Super?
The primary advantage of buying SMSF property is the potential tax benefits. For instance, net rental income from your SMSF property is taxed at only 15%. Additionally, there are capital gains tax discounts and other tax concessions provided by the Australian Taxation Office (ATO) for properties held within an SMSF.
Can I Use My Super to Buy a House for Personal Use?
No, you cannot use your super to buy a house for personal use. The property purchased through an SMSF must satisfy the “sole purpose test”, meaning it should be set up solely for providing retirement benefits. The property can’t be the primary place of residence for a fund member or related parties.
How Does SMSF for Property Investment Work?
An SMSF for property investment allows members to invest their superannuation funds in property. However, there are strict guidelines to follow. For instance, the property must meet the “sole purpose test”, cannot be purchased from fund members or their relatives, and cannot be rented by any of the fund members or related parties.
Is it Worth Buying Property with Super Given the Compliance Rules?
The worth of buying property with super, given the compliance rules, largely depends on individual circumstances. While there are potential tax benefits and investment returns, the strict compliance rules can be challenging for some investors. It’s essential to understand these rules thoroughly and consider the long-term implications of your investment. Consulting with a property tax specialist can provide clarity on whether this investment aligns with your financial goals.
What are the Key Guidelines When Considering SMSF for Property Investment?
Key guidelines include ensuring the property satisfies the “sole purpose test” for retirement benefits, not buying from fund members or their relatives, ensuring the property isn’t a primary residence for members, and not renting the property to fund members or related parties.
How Can I Ensure Compliance When Using My Super to Buy a House?
Regular consultations with a property tax specialist or SMSF advisor can help ensure you remain compliant. Staying updated with regulations, attending relevant seminars, and being proactive in understanding SMSF guidelines are crucial.
How Does Capital Gains Tax (CGT) Apply When Selling a Property Purchased with SMSF?
When you sell a property purchased through an SMSF, you may be liable for CGT. However, there are concessions available. If the property has been held within the super fund for more than 12 months, it qualifies for a CGT discount of 33.33%, reducing the capital gains tax liability to only 10%.
Furthermore, if the fund is in the pension phase when the property is sold, the capital gain might be tax-free. It’s essential to consult with a property tax specialist to understand the specific implications and benefits related to CGT for properties within an SMSF.
Disclaimer
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
Amir Ishak is a Limited Authorised Representative 1269908 of Merit Wealth Pty Ltd, Australian Financial Services Licence 409361, ABN 89 125 557 002
