Invest Successfully via SMSF which is an attractive investment vehicle to build long-term wealth. You’ll enjoy tangible benefits including:
– a lower tax environment and
– capital gains concessions at retirement and
– the ability to leverage funds through borrowing money
If the SMSF owns the property from which you run your own business, it must pay a commercial rate of rent to the fund. This provides an effective way to accelerate superannuation savings.
The rent that your business pays to the SMSF is tax deductible. And it is not treated as a superannuation contribution.
Why is this important?
– Because tax benefits on super contributions are currently limited to $30,000 pa.
– Rent does not count towards that limit. So you can build your retirement faster and more tax efficiently
– assets held in an SMSF are not calculated towardscapital gains tax (CGT) concessions that apply when you sell your business or retire
By planning ahead, you can ensure that you better qualify for these concessions.
The SMSF pays a concessional tax rate of 15% on rental income, versus your individual marginal tax rate.
Additionally, certain operational property expenses are tax-deductible to the fund.
Tax benefits also extend to capital gains tax (CGT) when you sell the property assets out of the fund.
– If you sell while still in the “accumulation” phase, the fund will generally pay CGT of up to 10% of capital gain*
– This is conditional on ownership for at least 12 months
*Capital Gain = selling price less purchase price of the property
Sale of the property after you have transferred it into the “pension” phase.
– any capital gain is exempt from tax.
– once trustees start receiving a pension at retirement, rental income or capital gains arising in the fund will be tax-free.
Investing in commercial property through an SMSF has some advantages over residential properties.
Commercial property can be sold to an SMSF by its members.
It can also be leased to SMSF trustees or an individual or a business related to the trustees or individual.
Holding commercial property in an SMSF is open to all trustees of the SMSF
TIP – many small business owners use their SMSF to purchase business premises and then pay
Any property purchased through an SMSF cannot be lived in by you. Nor any other trustee, or anyone related to the trustees, regardless of how distant the relationship is. The property cannot be rented by you, any other trustee, or anyone related to the trustees.
As such, buying a holiday home in your SMSF and living there during your holiday break is not allowed.
You cannot transfer an existing residential investment property you own into an SMSF. Neither by way of the fund purchasing it at market value, nor by you contributing to it within the cap limits.
Superannuation contributions amount and consistency are material to the calculation of your borrowing capacity for a mortgage loan in the SMSF.
Borrowing to buy a property through an SMSF is achieved through a Limited Recourse Borrowing Arrangement (LRBA). To limit the recourse of the lender, a separate property trust (called a Bare Trust) is established. The Bare Trust holds the property on behalf of the SMSF. This borrowing structure falls outside the formal structure of the SMSF. It is established specifically and solely for the purchase of the [one] relevant property.
As such, each title will require its own Bare Trust, Trustees, and LRBA. Any exceptions to this standard are outlined by the ATO. Each property holds a dedicated bank account, for all relevant property income and expenses. Most lenders consider finance for an SMSF with a balance of at least $200,000. Each bank or lender has specific terms that apply.
Consult with a bank or mortgage broker in advance of establishing an SMSF, to assess if you meet the criteria to raise finance.
Mortgage loan repayments are made from the SMSF, which can fund these from rental income and incoming superannuation contributions. However, you must ensure your SMSF is always funded to meet the loan obligations.
The property must be purchased and held in the name of the Trustee of the Bare Trust.
You must set up the Trust in advance of purchasing the property. This will ensure you avoid onerous stamp duty costs.
I have seen this happen. Please be careful
TIP – The requirements for the timing of the setup of the fund and
the legal entities required for the property settlement differ per State
Depending on your financial situation, an SMSF can give you more control over your superannuation and retirement. With complicated rules and strict governance in place, those looking at investing in property through their SMSF should always seek qualified and experienced advice.
It is important to carefully observe the rules and regulations when buying property inside an SMSF. You can access the details for the SMSF rules at the Australian Taxation Office website. Anyone who advises on an SMSF must have an Australian financial services (AFS) license. ASIC Connect’s Professional Registers will tell you if the company or person holds an applicable AFS license.
The information contained in the article may not be appropriate to your individual needs therefore you should seek personal financial advice before making any financial or investment decisions.
Article Disclaimer: This information should not be considered personal financial advice as it is intended to provide general advice only. The article has been prepared by Perryn Slighting without taking into account your personal objectives, financial situations, or needs.
I’d love to speak with you!
Investors can use their Self-Managed Super Fund (SMSF) to buy property and build long-term wealth. However, they must follow strict regulations. First, the property must meet the sole purpose test and benefit retirement savings. That means investors cannot live in or use the property before retirement.
Additionally, SMSFs can only borrow using a limited recourse borrowing arrangement (LRBA). As a result, the lender can only claim the property, not other SMSF assets. Most banks require a 30-40% deposit, making a large super balance necessary.
On the plus side, rental income and capital growth receive tax benefits. Even better, rental income and capital gains become tax-free in the pension phase. However, managing SMSF property investments is complex. For example, investors must comply with Australian Taxation Office (ATO) rules.
All transactions must be at arm’s length, preventing leasing to related parties. Furthermore, liquidity issues arise when too much super is in one asset. To reduce risk, investors should diversify their SMSF portfolio. Many investors seek professional advice to simplify the process and ensure compliance. By staying informed, they can maximize tax benefits and long-term financial stability. Ultimately, SMSF property investment offers great potential but requires careful planning.
Investing in property with your Self-Managed Super Fund (SMSF) can be a strategic way to build long-term wealth. , It requires careful planning and compliance with strict regulations. First and foremost, it’s essential to understand that your SMSF can only purchase property if it aligns with the sole purpose test, which means it must provide retirement benefits to members. In other words, you cannot live in or directly benefit from the property before retirement.