Using a Self-Managed Super Fund to Buy Property
Like most super funds, a self-managed super fund is a way of saving for your retirement, however the difference between a SMSF and other types of funds is that the members are usually also the trustees. Therefore as a member, by managing your own super fund, you must ensure you are responsible for complying with the super and tax laws.
When looking to use your SMSF to purchase property, it is important to understand all the rules and conditions associated. One of the most important rules to understand related to buying property with your SMSF is that it can only be used for investing in property.
While you can use your super to buy property and take out a home loan, it is best to speak with a Mortgage Choice broker and always seek tailored advice from a qualified accountant or tax agent before proceeding with this decision.
Buying property with Your SMSF
In order to buy property with your SMSF you must ensure you comply with the rules set out by the ATO.
The general SMSF property rules include:
Additionally, along with the above rules it is recommended that your investment property is consistent with the investment strategy and risk profile of your fund.
Self Managed Super Fund Home Loans
Obtaining a home loan using a SMSF to buy property involves very strict borrowing conditions. All SMSF home loans must be taken using a limited recourse borrowing arrangement (LRBA). To “limit the recourse” of a lender, an LRBA involves establishing a separate property trust and trustee on behalf of the super fund, outside of the SMSF structure. All the income and expenses of the property go through the super fund’s bank account and the super fund must meet all loan repayments. If the super fund fails to do this, the lender only has the property held in the separate trust as recourse, and therefore cannot access any remaining assets of the super fund.
When borrowing from your SMSF there are many considerations and risks associated with this type of home loan.
The key risks that you should be aware of when considering a SMSF home loan are:
Compliance costs: SMSFs need to value all of their assets at market value, and the valuation needs to be based on objective and verifiable data.
Higher costs: Loans using SMSF can be more costly than other property loans.
Cash flow: When buying property using SMSF, your loan repayments must come from your SMSF’s bank account. Therefore you will need to ensure your fund always has sufficient cash flow to meet repayments.
Difficult to cancel: You are unable to unwind the arrangement for a SMSF property. If there is an issue with your loan documents and contract, you may have to sell the property, this can potentially cause substantial losses to your SMSF.
Possible tax losses: You are unable to offset tax losses from the SMSF property with taxable income outside your fund.
Commercial property tax considerations: If you’re investing in a commercial property and your earnings are in excess of $75k you are required to register for GST.
Capital gains tax considerations: If you choose to sell the property you will need to ensure the appropriate capital gains tax is paid. It is of course recommended that you speak with your qualified accountant or tax agent to discuss all possible tax implications before buying property with an SMSF.
No alterations to the property: You may undertake normal repairs and maintenance to the property, however, under the LRBA rules, improvements and renovations are not allowed. Any maintenance or repairs made cannot result in the property becoming a new asset.
These risks further outline the significance of seeking specialist advice before buying property with an SMSF.
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SMSF for Property Investment
As mentioned above you are able to use your SMSF for an investment property, however there are some restrictions you must adhere to.
Firstly, no one associated with your fund should get a present day benefit from the investment, as your SMSF should only be maintained for the sole purpose of providing death or retirement benefits to the members and their dependents.
Another key rule to adhere to is the fact that this property must be an investment, and in the case of residential properties, any related parties are not permitted to live or rent the property, and the property cannot be purchased by a related party. In relation to your SMSF the ATO has outlined a “related party” to include:
- All members of the fund
- Relatives of each member
- Business partners of each member
- Any spouse or child of those business partners
- Any company the member or their associates control or influence
- Any trust the member or their associates control.
- Standard employer-sponsors” employers who contribute to your super fund for the benefit of a member, under an arrangement between the employer and a trustee of your fund.
- Associates of standard employer-sponsors: business partners and companies or trusts the employer controls (either alone or with other associates) and companies and trusts that control the employer.
While this rule applies to residential properties, when purchasing a commercial property using SMSF, you are able to lease it to a wide range of tenants - as long as the property is exclusively used for business purposes. This means that the commercial property can be leased to yourself or your own business, provided it’s done on an arm’s length basis and the lease agreement clearly outlines terms and conditions that match standard commercial agreements. You will also need to ensure that market rate rent must be paid regularly into the super fund’s bank account.
Property investor guide
Our free, downloadable guide explains the costs and steps associated with the purchase of an investment property, positive/negative gearing as well as pros and cons of houses vs. units.
SMSF Property FAQ's
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