SMSF

SMSF & Property

SMSF

You can purchase an investment property through your SMSF. AUSTWIDE Invest can help you through our vast network of professionals from start of setting up your SMSF to the end of purchasing your property.

Owning a property within your fund can be much more tax effective than investing in your own name. For example, once your SMSF has held the property for more than 12 months, capital gains made on its sale will be taxed at a maximum rate of 10% (and 0% if the fund is in the pension phase).

In addition the rental income from the property is taxed at a maximum rate of only 15% (which also drops to 0% in the pension phase). If the property was in your own name the rental income would be taxed at your marginal rate which can be up to 46.5%.

Many experts believe that setting up a SMSF is one of the most tax effective and efficient ways of saving for your retirement. One way of doing so is to use your SMSF as a vehicle with which to buy property. This may, at first glance, sound like a complex and risky option but it could also be one of the smartest financial moves that you will ever make – if it is properly set up and managed!

If you have sufficient funds in your Self-Managed Super Fund and want to use this to make a deposit for a property, you could be eligible for a SMSF Loan. Superannuation laws prevent SMSFs from borrowing using typical property loans because by doing so they would potentially jeopardise all of the assets of the SMSF to make a deposit for a property, you could be eligible for a SMSF Loan.

To make sure that adequate security is provided while complying with superannuation laws, the SMSF needs to set up and hold 100% of a holding trust, for the sole purpose of owning the security property on the SMSF’s behalf. The holding trust becomes the owner of the security property and the SMSF is the borrower.

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Self-managed super fund property rules

You can only buy property through your SMSF if you comply with the rules.

The property:

  • Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
  • Must not be acquired from a related party of a member
  • Must not be lived in by a fund member or any fund members’ related parties
  • Must not be rented by a fund member or any fund members’ related parties.

What it will cost you

SMSF property sales may have many fees and charges. These fees can add up and will reduce your super balance.

You should find out all the costs before signing up including:

  • Upfront fees
  • Legal fees
  • Advice fees
  • Stamp duty
  • Ongoing property management fees
  • Bank fees

SMSF borrowing

Borrowing or gearing your super into property must be done under very strict borrowing conditions called a ‘limited recourse borrowing arrangement’.

A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.

Geared SMSF property risks include:

  • Higher costs – SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
  • Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
  • Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
  • Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
  • No alterations to the property – Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.

Speak to us about how we can help you set up your SMSF and find the right property for you.