Using a self-managed super fund (SMSF) to buy property is becoming increasingly popular but the decision to acquire property through your SMSF is one that requires careful consideration.
You have to ensure it supports your overall investment strategy and avoids unnecessary risk.
So how do you go about it?
Limited Recourse Borrowing Arrangements (LRBA) have increased the popularity of property purchases in SMSFs.
SMSFs can use borrowed monies to purchase a single asset, or a collection of identical assets that have the same market value. The SMSF trustees receive the beneficial interest in the purchased asset but the legal ownership of the asset is held on trust (the holding trust).
The upside is that with an LRBA, your whole super fund is not at risk if the loan is defaulted. There are also restrictions on the way a debtor can recover their funds.
Before you leap in you need to ask yourself:
- If you use your SMSF to buy property, what sort of property should it be?
- What do you do if you don’t have an SMSF?
- Is it worthwhile setting up an SMSF to purchase property?
What are the advantages?
There are significant advantages to having a property in an SMSF, including tax – your super fund will be taxed at 15 per cent – which is considerably lower than most people’s personal tax rates.
If the property is sold during the accumulation phase, the capital gains tax is calculated at a discounted rate. If the asset is sold while the super fund is in pension phase, it’s tax free.
However, there are a few things to bear in mind if you plan on setting up an SMSF specifically to buy property, whether it’s residential or commercial.
Residential purchase in an SMSF
It’s important to note that you can’t buy a residential property to live in, or for any family member to live in.
There’s a condition that the SMSF trustee, its members, or any relatives can’t benefit from the property.
The property purchase must be for the sole purpose of supporting the SMSFs investment strategy in building wealth for retirement.
Don’t have enough savings in super?
If you’re looking for a way to buy a residential property but your super fund doesn’t have enough money, or you don’t want to go through an LRBA, there’s another option you can explore:
A Tenants In Common (TIC) arrangement would allow you to split the borrowing across your family home and your super fund.
For example, if the property you want to buy is $400,000, with a TIC, you could borrow $200,000 against your family home and use $200,000 from your super fund. Commercial purchase in an SMSF
Most commonly, people use their SMSF to buy a commercial property to lease back through their business. But there are a few specific conditions you need to be aware of if you’re considering this:
1. Commercially competitive: The terms of the lease must be commercially competitive. You aren’t allowed to lease it back for ‘mates’ rates’ to give yourself a financial advantage. The ATO monitors and audits SMSFs regularly to ensure all arrangements are compliant.
2. No rental holiday: When things get tight and there’s an income downturn, you aren’t allowed to skip the rent for a payment. The payments must be made on time, every time, in full.
3. Valuations: Compliance of the SMSF relies on regular valuations being done on the commercial property. This can be time consuming and requires a lot of paperwork.
4. Sole purpose test: The investment must satisfy the ‘sole purpose’ test, which is that its sole purpose is to provide retirement benefit to the fund’s members. Still interested?
Ultimately, the test of whether you should buy a property with your SMSF comes down to making a rational investment decision based on facts and advice.
Be sure to ask the following questions about your prospective investment:
- Is the property a good investment?
- Will it appreciate in value?
- What are the risks?
- What is the yield?
To equip yourself to make the best decision it is advisable to have a qualified, independent third party whom you are paying to have a look at the opportunity to give you their honest opinion. Anyone with a vested interest in selling the property may not be able to give you objective advice.