Self-Managed Super Fund (SMSF)
Investing In Property Through a Self-Managed Super Fund
A Guide to Buying Property Through an SMSF
Buying an investment property through a self-managed super fund (SMSF) has become increasingly popular in Australia. This has particularly been the case since it became possible for SMSFs to borrow money to finance a direct property purchase.
While property investment through an SMSF has certain advantages, it also has some strict rules that must be adhered to. Anyone considering property investment through an SMSF should make sure they’re familiar with the rules and potential tax implications.
SMSF Regulations for Investing in Residential Property
Property purchased through an SMSF cannot be lived in by any trustee of the SMSF or anyone related to the trustees. This regulation applies no matter how distant the relationship might be. In other words, you can’t buy a property through an SMSF and then live in it with your family.
An SMSF investment property also cannot be rented by any of the trustees or anyone related to the trustees. This means that you can’t buy a holiday rental property with an SMSF and then hire it out for personal use.
SMSF property investment rules also stipulate that you cannot put an existing residential investment property that you already own into an SMSF. This applies regardless of whether the SMSF is purchasing the property at market value or contributing to it within the cap limits.
The Tax Consequences of Buying Through an SMSF
If you buy a property through an SMSF, the fund will be required to pay a 15% tax on any rental income received from the property. On properties held for longer than 12 months, the fund will receive a discount on any capital gains it makes upon sale. This discount will bring any capital gains tax liability down to 10%.
If the property is purchased via a loan, the interest payments are tax-deductible to the fund. If property expenses exceed the rental income, then this counts as a taxable loss that is carried forward each year and can be offset on future taxable income.
Once trustees start receiving a pension at retirement, any rental income or capital gains arising from the fund will be tax-free.
It’s also important to note that if you make a loss on your property this cannot be offset against your personal taxable income outside the fund.
What Are the Rules for Buying Property Through an SMSF?
In order to purchase a property through a self-managed super fund, you’ll need to make sure you’re complying with certain rules. The main rules are:
- The property must be purchased with the sole purpose of supplying retirement benefits to members of the super fund. This is what’s known as the ‘sole purpose test’.
- The property can’t be purchased from any of the trustee’s related parties.
- The property cannot be lived in or rented by any of the SMSF members or any of their related parties. One exception to this rule is for commercial properties, which can be leased by a trustee or related party for business purposes. However, the property must be rented at the current market rate (no family discounts) and must comply with specific rules outlined by the Australian Tax Office (ATO).
For more information on the specific rules that apply to purchasing a property through an SMSF, visit the ATO website.
Before making any significant purchase it’s important to factor in all of the potential costs. Buying a property through a self-managed super fund can involve additional fees and charges when compared to a traditional property sale. This could include:
- Upfront costs such as establishment fees, trustee company fees, loan application fees, property evaluation costs and Lender’s Mortgage Insurance (LMI).
- Legal fees, including conveyancing costs.
- Professional advice fees.
- Property inspection costs.
- Stamp duty costs.
- Ongoing property management fees.
These added costs will have an impact on your super balance, so it’s worth obtaining independent expert advice regarding potential costs.
Keep in mind that professional SMSF advice can only be provided by those with an Australian Financial Services (AFS) licence. To confirm whether or not a person is licenced to dispense this information, consult the ASIC Connect Professional Register.
Obtaining a loan for an SMSF property purchase has become easier in recent years but it’s still subject to strict lending criteria. In particular, the loan must be in the form of a ‘limited recourse borrowing arrangement’ (LRBA).
With an LRBA, the property acts as security for the loan. If the SMSF defaults on repayments, then the lender’s options for recovering funds are limited to the property itself. The LRBA protects any other assets that are owned by the SMSF, ensuring the lender has no legal right to try and seize them.
Does your SMSF already contain the necessary funds to purchase an investment property? If so, you’ll be able to sidestep a lot of the paperwork and some of the costs associated with an SMSF investment property purchase.
With any kind of investment property purchase, it’s important to assess potential risks and see if they’re consistent with your preferred investment strategy.
If you’ll need a home loan to fund an SMSF property purchase, then some of the potential risks include:
- Increased Costs: A LRBA loan may attract higher fees and interest rates than a traditional mortgage.
- Cash Flow Limitations: You will be required to make loan repayments directly from your SMSF. This means you won’t be able to top up payments from a personal account if your SMSF funds are tied up in other investments. To avoid late payments or even defaulting on the loan, you’ll need to ensure your SMSF always has sufficient cash flow to meet the minimum repayments.
- Difficult to Unwind: It can be extremely difficult to make changes to an LRBA once it’s in place. If the initial loan and contract aren’t set up correctly, your only option may be to stick with an unsuitable arrangement or to sell the property (which could cause significant financial losses).
- Tax Considerations: Tax losses from an SMSF investment property can’t be used to offset personal income taxes. This means that you could miss out on potential tax offsets when using an SMSF to buy your investment property.
- No Renovations: You will be limited from making significant changes to the property until your SMSF loan is repaid in full.
For more information about the potential risks, contact the expert team at Positive Income Properties today.
What else should you consider when purchasing an investment property through an SMSF?
- Sales tactics from property developers can be aggressive. Be on guard if a developer is promoting an SMSF investment with competitions or perks such as free flights/meals.
- Seek expert independent advice if you’re feeling pressured to make a purchase decision.
- If you’re unfamiliar with a property market, then take time to do thorough research before making a decision.
- Ensure anyone offering you financial advice on an SMSF property purchase is fully licensed.
Positive Income Properties currently has a great range of SMSF stock located across various Queensland property markets. Our properties include house and land, dual key and custom-built homes suitable for NDIS Specialist Disability Accommodation.
Check out all of our available SMSF investment properties HERE.