A self-managed superannuation fund or SMSF is a trust that features a superannuation structure, yielding benefits upon retirement. An SMSF can have up to four members who also act as the trustees of the fund and can be utilized by members for their own specific investing needs. Investing in property through your SMSF is an appealing option to many Australians as they enjoy the tangibility of property and the freedom of choosing where to put their superannuation.
Investing in property using an SMSF is a process that can be beneficial if care is taken to abide by the superannuation laws. Investments and other transactions made by a SMSF are carried out in the name of the trustees of the SMSF, rather than individual members’ names. Investment in property may be funded wholly by the money from your self-managed superannuation fund or if the funds are insufficient a loan may be sought in the fund’s name. There are restrictions placed on whether you can develop the property, depending on the nature of funding. Property purchased with SMSF borrowings cannot be developed until the debt has been paid off in some instances.
Buying and investing in property with your SMSF has the following benefits:
Significantly Lower Tax Rates
Investing in property with your SMSF provides attractive tax benefits on your investments. Rent earned from the property is taxed at only 15 per cent, while the tax rate on capital gains on property held for at least one year is just 10 per cent. Both significantly lower than the top personal income tax bracket which reaches 47 per cent (including Medicare levy).
Income from property purchased within a SMSF is generally tax free when the fund kicks into retirement and you begin to receive a pension from the SMSF. You get the benefit of the rental income and gains with no kickback to the taxman.
Early Retirement Home Purchase
Although the superannuation laws make it impossible for you or your family to reside in any property your SMSF owns, you can still make preemptive purchases. You can purchase an attractive property at the current market price through your SMSF, wait until you retire and earn a pension from your fund and then transfer the property from your SMSF to private ownership. This helps you quickly purchase property that would otherwise climb in price and valuation in the future.
Rent Property to Your Business
You can lease out your SMSF investment property to your personal business. The property must be commercial in nature, due to the SMSF restrictions on residential property. Your business then pays a rental amount that is based on current market rates, which is generally tax deductible to your business. The rent goes into the SMSF but is not classed as a superannuation contribution, therefore not affecting your ability to make concessional and non-concessional contributions.
Purchasing Property Within SMSF
There are certain guidelines and regulations to consider before you can channel your SMSF into property investment. There are certain non-negotiable rules and mandatory directives that must be adhered to.
A paramount rule in SMSF property investment is called the ‘sole-purpose’ test. The sole-purpose test weighs the merits of the investment against the primary purpose of the super fund – to provide the member with retirement benefits or if the member dies, to provide benefits to their dependents. An investment that is made for reasons other than these cannot be made in the name of the SMSF. Purchasing residential investment property through an SMSF, for use by yourself or family at no cost is not allowed because this provides you or your family with current day benefits, not solely retirement benefits.
When considering investing in property through your SMSF the following may need to be considered:
– Renovating an existing property
– Building a new building
– Purchasing at an auction
– Commercial uses
Renovation of Investment Property
There are restrictions in place with regards to renovating property bought with your SMSF. Depending on how you funded the purchase, restrictions may apply to the extent of renovations that can be carried out on the building. If at the time of purchase, only the funds in your SMSF were used, you can carry out extensive renovations of your choosing. However, if you take out a loan through your SMSF you are not allowed to carry out extreme renovations, capable of changing the identity of the property. Repairs can be carried out on the property, as long as it does not extend towards altering the property. Failure to adhere to these guidelines can result in fines and penalties and could put your SMSF at risk of becoming non-complying.
Building a New Building
The land to be developed must not be purchased from a member, relative or anybody connected to the SMSF or any of the trustees. There must be a neutrality on the part of the vendor or supplier of the land. Contractors that are employed generally should not be the members or relatives of any members of the SMSF, to ensure superannuation laws aren’t breached.
An SMSF that has enough funds to develop a building can use them for that purpose. A fund that has to take a loan or borrow monies to fund such property development must first settle the debt before construction can commence.
Purchasing at an Auction
Due to the instantaneous nature of auction purchases, transactions become legally binding upon acceptance of a bid. You will need to draw up the necessary documents and establish your SMSF before the auction begins, to ensure your bids are done in the name of the superannuation fund.
Purchasing property for commercial use is a common SMSF investment. The property is bought under the SMSF’s name and then leased out to a business run by a member/trustee. Before engaging in this move, one must consider the guidelines and mandatory checks have been instituted.
The lease must be at a competitive market price. You cannot lease at a significantly lower rate otherwise you’d be breaching the superannuation laws. The Australian Tax Office conducts regular checks and audits the activities of SMSFs, so you must ensure you comply with the superannuation laws. Leases and rents must be paid as due, there can be no arrangements to bypass payments due to the relationship with the trustees of the SMSF – payments must be prompt and complete.
Many Australians enjoy the freedom of investing that an SMSF offers. But with that freedom comes the burden of compliance. As mentioned above, the ATO regularly audits SMSFs so it is crucial that you seek advice from a Certified Financial Planner, Accountant and Auditor when making decisions for your SMSF. Investing in property through your SMSF is an appealing option to many Australians, but it is not something you should go at alone.
Elliot Watson Financial Planning is able to support you in establishing a Self-Managed Superannuation Fund (SMSF) and Tiron Manning can guide you through the process of finding, purchasing, and managing a suitable investment property through your SMSF.
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The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.
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