Property investment using my Self Managed Super Fund
Property investment through many retail, corporate or industry superannuation funds or through a self managed super fund (SMSF) has increased significantly in the past decade. However the options for property investment vary across different types of super funds.
In a retail, corporate or industry super fund, you may be able to invest in property indirectly. Many of these funds allow investments in listed property trusts or as part of a large diversified portfolio that makes investments in certain types of property such as infrastructure or commercial property. These indirect property investments can be accessed in an SMSF too.
In an SMSF, investments can also be made directly in residential and commercial property using your super. For example, a fund can buy business premises or an investment property. As trustee of your SMSF (or a director of the corporate trustee of the SMSF), you have greater control over which property (or properties) your fund is invested in. You choose which property to buy, manage the rent and any expenses and determine when it is time to sell.
Before buying property within an SMSF, it is important to understand superannuation law and other relevant law in this area. Importantly, the SMSF’s trust deed must enable property to be purchased and property must form part of your fund’s investment strategy. There are also restrictions on who you can buy the property from and who it can be rented to.
Some questions to consider include:
What Types of Property Can I Buy:
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 dependents if a member dies before retirement.
Residential property: there is nothing to prevent an SMSF from investing in residential property as long as the property is not acquired from a related party of a member.
However, the family home cannot be owned by 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 of your choice that you rent out to tenants who are not fund members or their relatives.
Commercial property: you can also hold commercial property, including your own business premises, in your SMSF.
While the property still needs to meet the sole purpose test, when dealing with commercial property, an SMSF can generally purchase 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 will be particularly important when acquiring and / or leasing property to a member or related party of the fund.
Can i borrow to invest through my SMSF:
Yes. However, there are strict rules governing how the loan and subsequent property purchase is structured when using borrowed money inside an SMSF.
Borrowing through an SMSF for property investment purposes must be done under what is referred to as a limited recourse borrowing arrangement. These arrangements can be quite complicated and may require professional advice. For example, under these arrangements, the property must be kept separate from the fund’s other assets. This ensures that if the fund defaults on making loan repayments, the bank and any interested parties will only have recourse over the property, but not to other fund assets. In order to achieve this, the borrowing rules require you to establish a security trust which will recognise the beneficial interest of the SMSF in that property and the rights of the lender. The trustee of this security trust holds the property in trust with the SMSF as the beneficial owner.
Another important factor when borrowing to invest in property is that loan conditions in an SMSF are different to those for regular housing loans. The maximum loan amount relative to property value will generally be lower and a range of conditions and risks need to be considered.
So, if you are considering borrowing through your SMSF, you should seek professional advice from a specialist financial adviser.
What are the Benefits:
There could be several benefits of buying property through an SMSF and these include:
Tax savings: if you buy and hold property within your SMSF until you retire and start taking a pension from your fund, it will generally be exempt from capital gains tax when the fund sells the property. Also, any income received by your fund (ie rent received) 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 also 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 would also apply to any capital gains tax payable on the sale of the property (albeit after receiving a 50% reduction if the property was held 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 in your fund might be a good way 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 will need to pay rent to your superannuation fund which 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 going over the contribution limits.
Asset protection: assets held in a superannuation fund (including property) are generally protected from creditors in the event of bankruptcy. However, before you decide to invest in property through your SMSF, there are several things you should consider. These include:
Investment strategy: any investment made by your SMSF must align with its 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 those investments 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 as and when the need arises without having to sell the property at short notice.
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