August 17, 2015
It has always been possible to purchase property through an SMSF or Self Managed Superannuation Fund – your fund just needed enough cash to buy the property outright. However, a Legislative change in September 2007 to the Superannuation Industry Supervision Act (SIS ACT) permitted superannuation funds to borrow, in order to invest in direct property or shares, subject to certain strict conditions.
Before setting up an SMSF, you must meet with your Financial Advisor who will undertake a full assessment of your position and provide written advice as to whether or not an SMSF is appropriate to your circumstances. If you decide to proceed down this path, it is important you understand the particular risks associated with superannuation fund gearing, ie. borrowing money to purchase assets.
Some of the key considerations with regard real property are:
Investing in property must be consistent with your SMSF investment strategy
The property is held in trust for the SMSF by the property trustee
In the event of a loan default, the mortgage lender only has recourse to the security property. It cannot make claim to any other SMSF assets
The SMSF makes the loan repayments. After the home loan is repaid, legal ownership of the property is transferred to the SMSF
The SMSF can purchase any kind of property (including residential, commercial or rural)
The SMSF can pay out or reduce the mortgage loan at any time (subject to the terms and conditions of the home loan or mortgage)
All rent is paid directly to the SMSF. Loan repayments are made in the usual way from the SMSF to the mortgage lender
There are some great benefits in owning property through an SMSF. Some of these benefits are:
- Ability to own your business premises (but not operating assets) in the SMSF
- Maximum 10% capital gains tax is payable on any capital gain if the property is sold after a minimum of 12 months and no capital gains tax is payable if sold during pension phase
- Maximum 15% income tax on rental income. Income from the property can help pay off the mortgage loan
- Your assets are secure as the mortgage lender does not have recourse to your SMSF’s other assets in the event of default
- Interest expenses may be claimed as tax deductions by the SMSF which can potentially reduce your SMSF’s tax liability
There are also a number of restrictions with regard purchasing property through your SMSF. Some key restrictions are:
- The SMSF must purchase residential property from an unrelated party, ie. an arms length transaction. Having said that, you can buy “business real property” (property used “wholly and exclusively for business purposes”) from a related party on an arms length basis for full market value.
- If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the fund – not your regular income.
- You can’t live in the property and neither can any friends or family members (however, you may lease “business real property” to a related party – provided the lease is on an arms length basis for full market value).
- You can’t use borrowed money to renovate or make capital improvements to a property purchased through a SMSF while it is still under a loan (SMSFR2011/D1).
- There are significant set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
- Running a SMSF can be complicated and penalties for getting things wrong are high. However, you can pay a professional to run it for you.
Is it right for you?
Setting up and running an SMSF could be the best financial decision you make. To see if it’s right for you, call our Financial Advisor, Joshua Boctorani on 02 8765 8702 and start the conversation.
Note: It is imperative that you obtain independent legal, taxation and financial advice regarding your superannuation intentions. This factsheet cannot replace such advice.