Have you ever heard around the barbeque how people are using their SMSFs to buy property? It may sound too good to be true (and it often is) but it is possible especially those with larger superannuation account balances. But is it the right thing for you? SMSF expert and financial planner Aimee Taylor explains below.

Investing in Property through a Self-Managed Super Fund (SMSF)

A Self-Managed Super Fund (SMSF) is a private superannuation fund that you manage yourself, providing greater control over your retirement savings. Investing in property with an SMSF can offer attractive opportunities for wealth building and tax savings.

An SMSF allows you to invest in a range of assets such as property, direct shares, and managed funds, offering the opportunity to diversify your investments and benefit from potential tax advantages.

Residential Property Investment

Managing your own super fund enables you to invest in residential property, including apartments, houses, or townhouses. The rental income from these properties goes directly into your SMSF, increasing your retirement savings.  

Purchasing property through an SMSF differs significantly from purchasing property for personal use. The investment must align with the fund’s established investment strategy and meet the sole purpose test of providing retirement benefits to fund members.

Commercial Properties

Business owners can leverage the flexibility of an SMSF to acquire commercial property. If you are a business owner, you can elect to purchase an office space for your business by buying the office under your SMSF’s name. Hence your SMSF owns the property.

Next, your SMSF rents out the office space to your business. Your business pays rent to your SMSF, which can then be claimed as a business expense. Essentially, your rent serves a dual purpose, to pay off your loan within your SMSF and also acts as income for your SMSF.

Strategically Acquiring Property Using a Self-Managed Super Fund

1. Establish your SMSF: You can either create your own fund or get professional help to set it up. Establishing an SMSF involves organising all the necessary documentation for legal and regulatory compliance, acquiring the appropriate insurance, and informing your employer.

2. Create a Property Investment Strategy: Create an investment strategy tailored to the particular needs of your self-managed super fund. Your investment strategy should consider diversity, risk tolerance, liquidity, and member’s retirement goals.

3. Research Property: Consider all available properties within your budget range, including the location, size, rental income potential, and other associated costs such as loan repayments, land tax and stamp duty. By focusing only on investment-grade properties, you can secure properties that possess both good growth potential and rental income.

4. Buy the Property: Your SMSF can now purchase the property, either outright (if it has sufficient funds) or by getting a loan. After purchasing, manage your property professionally to ensure it delivers a steady stream of rental income to your SMSF.

Benefits of SMSF Property Investment

By using an SMSF, you can gain greater control over your retirement savings and take advantage of opportunities that you might not have been able to access through traditional investing methods. Over the past 30 years, Australian housing values surged significantly. Houses appreciated by 414.6%, while units grew by 293.1%.While short-term trends may dominate discussions, Australian homeowners tend to hold their properties for much longer than a typical market cycle, with a median hold period of nine years.

Tax Advantages of SMSF Property Investment

Using the funds in your SMSF to purchase property means you benefit from the same tax-advantaged opportunities as you would with other types of investments. The main advantage is that rental income and capital gains generated by a property owned in an SMSF are taxed at 15%. This means more money remains in your super fund instead of ending up paying taxes. For properties held for more than 12 months, the fund is entitled to a one-third discount on any capital gain realised upon sale. This effectively reduces the capital gains tax liability to just 10%, resulting in significant savings.

You’ll also be pleased to note that when your fund enters the pension phase, your SMSF is exempt from capital gains tax. This allows your savings to grow unhindered, optimising your financial security in your golden years.

If you buy the property with a loan, you’ll be happy to know that the interest payments can be deducted from the fund’s taxes. Once trustees start receiving a pension at retirement, any rental income or capital gains arising in the fund will be completely tax-free.

Limited Recourse Borrowing Arrangements

Since 2010, it has become possible for SMSFs to borrow money to purchase property. This is known as a limited recourse borrowing arrangement (LRBA). This arrangement allows SMSFs to purchase property with just a fraction of the funds they have available, while providing greater flexibility in terms of how much money is put into the investment.

For instance, consider an SMSF that has $200,000 in cash. With a limited recourse borrowing arrangement (LRBA), the fund can use a portion of these funds, say $50,000, as a deposit to secure a property worth $200,000. The rest of the property cost can be financed through a loan. The rental income from the property will help to cover the loan repayments. Over time, as the property appreciates, the SMSF can sell the property and pay off the remaining loan amount. The net capital gain, taxed at a concessional rate, remains with the super fund, thereby increasing the retirement savings.

Drawbacks of Buying Property through SMSF

While buying property through an SMSF can offer potential tax benefits and diversification of your investment portfolio, it is not a decision to be taken lightly. Firstly, the cost and complexity of setting up and running an SMSF can be significant. Additionally, SMSFs are subject to stringent regulatory requirements and failure to comply can result in heavy penalties.

Things to Be Aware of Before Buying Property through SMSF

One of the key drawbacks of buying property through an SMSF is the complexity involved in the process. The legal and financial responsibilities of managing an SMSF can be overwhelming for many, not to mention the risks of non-compliance with superannuation laws. There are strict rules regarding the types of investments an SMSF can make and the conditions under which assets can be bought and sold.

Another major consideration is that residential property purchased through an SMSF cannot be occupied by the fund’s members or any related parties. This means you can’t live in the property you own through your SMSF. It also implies that the property cannot be rented to any family members. This rule is in place to ensure the assets of the SMSF are used solely to provide retirement benefits to its members.

Conclusion

SMSF property investment is a sound choice for those who want to gain control over their retirement savings and benefit from tax advantages while investing in real estate. By following the steps outlined above, you can make sure your SMSF property investments are safe, profitable, and compliant. If you’re considering this approach, consulting with a financial adviser can provide expert guidance tailored to your specific situation.