Investing in property through a Self Managed Super Fund (SMSF) has grown in popularity in recent years, particularly since it became possible for SMSFs to borrow money to fund a direct property purchase.
SMSFs are an attractive investment vehicle to build long-term wealth. with meaningful benefits, including a lower tax environment, capital gain concessions at retirement, and leveraging funds through borrowed money.
There are several advantages to holding property inside an SMSF,
as opposed to owning it in your name.
These are specifically defined around wealth creation,
growing your super fund, and reducing your tax liabilities
Where the property owned by your SMSF is the property from which you run your own business, superannuation rules require your business to pay a commercial rate of rent to the fund, providing you with a way to accelerate your superannuation savings.
The rent that your business pays into your SMSF is tax deductible to your business. But more importantly, it is not treated as a superannuation contribution.
Why is this important? Because tax benefits available on superannuation contributions are currently limited to $27,500 a year for all ages. The rent payments do not count towards these limits. This means you can build your retirement faster and more tax efficiently.
In addition, if you are a small business owner,
superannuation assets are not included when determining your eligibility for small business 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 which could be as high as 46.5%, or your company tax rate which is currently 30%.
Additionally, certain property expenses such as land rates, property maintenance, etc. are tax-deductible to the fund, reducing the effective tax rate even further.
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% on any growth in the property value, assuming that the property has been owned for at least 12 months. Growth here refers to the difference between the purchase price and the selling price of the property.
However, if you decide to sell the property after you have transferred it into the “pension” phase within your SMSF, any capital gain will be exempt from tax altogether. And once trustees start receiving a pension at retirement, any rental income or capital gains arising in the fund will be tax-free.
Superannuation contributions amount and consistency are material to the calculation of your borrowing capacity for a mortgage loan in the SMSF
Any property purchased through an SMSF cannot be lived in by you, 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, either by way of the fund purchasing it at market value or by you contributing to it within the cap limits
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
The borrowing criteria for an SMSF are more complex and expensive than for an individual property loan.
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) and Trustee are established to hold the property on behalf of the SMSF.
This borrowing structure falls outside the formal structure of the SMSF and 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), as well as a dedicated bank account, to accommodate all relevant property income and expenses.
Currently, most lenders will consider finance for an SMSF with a balance of at least $200,000.
If your main objective for establishing an SMSF is to purchase property with a mortgage, then consulting with a bank or mortgage broker is highly recommended 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, it is your responsibility to ensure your SMSF always has funds available to meet the loan and other relevant property obligations.
The property must be purchased and held in the name of the Trustee of the Bare Trust.
If you first purchase the property and then subsequently set up your SMSF and associated legal entities to arrange finance for the settlement of the property, you may run into onerous and expensive stamp duty implications.
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.
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