Purchasing Property in Your Self Managed Super Fund (SMSF)
- Jan 25, 2016
- By Dim Mastoros
- In News
- Comments Off on Purchasing Property in Your Self Managed Super Fund (SMSF)
The fact that self-managed super funds (SMSFs) have allowed people to borrow money to purchase assets such as property has arguably been the best tax incentive for property investing since negative gearing tax perks.
What is an SMSF?
Self-managed superannuation funds (SMSFs) do pretty much what they say on the tin: rather than paying super contributions into an industry fund or wrap, you pay it into a fund that you run yourself.
You choose what to invest in, and that can include direct property. All the running expenses of the property are paid by the fund, meaning you’re not out of pocket in the same way you would be with a directly-owned investment property, and your fund can take advantage of significant tax benefits.
What are the benefits?
If you buy and hold property within your SMSF until you retire and then start drawing a pension from your fund, when the fund sells the property, the transaction will generally be exempt from capital gains tax. Also, any income your fund receives (ie rent) while you are drawing a pension will be completely tax free.
Before you start to draw a pension from your SMSF, any rental income generated will be taxed at a maximum of 15%. And, if the fund sells the property after holding it for at least one year, your fund will only pay capital gains tax on the sale of the property of up to 10%.
Comparatively, if you were to buy the same property in your own name, rental income would be taxed at your personal tax rate (which could be as high as 46.5%). This tax rate would also apply to any capital gains payable on the sale of the property (albeit after receiving a 50% reduction if the property was held for more than one year).
You may not be able to afford to buy property in your own name; however, you and other members of the fund might have a reasonable amount of combined super saved inside your fund. Buying property through your fund might be a good way for you to achieve your goal of owning an investment property or owning your own business premises.
Benefits for Business Owners
If you own your business premises through your super fund and you lease it to your business, you rent you pay to your SMSF is generally tax deductible to your business. Given the relatively low concessional contribution limits that are currently available, paying rent to your super fund could be a great way to accelerate your retirement savings without exceeding the contribution limits.
Assets held in a superannuation fund (including property) are generally protected from creditors in a bankruptcy. However, before you decide to invest in property through your SMSF, you should consider these points:
- Investment – any property investment must align with your SMSF’s investment strategy
- Diversification – property generally has a significant value and may reduce diversification in your portfolio, depending on the value of your fund’s other investments and what asset classes they are in
- Liquidity – the nature of property could make it difficult to dispose of quickly. You should check whether your fund is sufficiently liquid and able to pay expenses and benefits when the need arises without having to sell the property at short notice.
What type of property can you purchase in your SMSF?
You can use your SMSF to buy residential or commercial property. However, any property held by your SMSF must meet the sole-purpose test of providing retirement benefits to fund members, or a benefit to their dependants if a member dies before retirement.
There is nothing to stop an SMSF from investing in residential property as long as you don’t buy the property from a related party of a member.
For example, you can’t own the family home through your super fund. Nor can you rent a residential property owned by your SMSF to a fund member, or to their related parties.
However, you can buy an investment property that you rent to tenants who are not fund members or relatives.
You can also hold commercial property, including your own business premises, through your SMSF.
While the property still needs to meet the sole-purpose test of providing retirement benefits to its members, when dealing with commercial property, an SMSF can generally buy the property and lease it back to a member or a related party of the fund – including the member’s business.
An arm’s length sale price and lease arrangement is especially important when acquiring and/or leasing property to a member or related party of the fund.
Borrowing to invest in property also involves different loan conditions for an SMSF compared with regular housing loans. The maximum loan amount relative to the property’s value will generally be lower and you need to consider a number of conditions and risks.
We recommend that you speak with an accountant and financial adviser to help you decide if buying property through your super fund is right for you. To find out more about how we, or an accountant or financial advisor in our professional network, can help you with your SMSF property purchase, please contact us today.