Using your self-managed super fund to buy property

USING a self-managed super fund (SMSF) to buy property is becoming increasingly popular but acquiring property through your SMSF requires careful consideration.

You have to ensure it supports your overall investment strategy and avoids unnecessary risk.

What is a SMSF?

A self-managed super fund (SMSF) is a savings account for your retirement that you manage yourself, rather than one that’s managed by a superannuation provider.

The do-it-yourself super method allows you to be more closely involved with what you invest in and offers tax benefits that major providers do not.

However, it comes with a lot more responsibility, as you are in control and must make sure everything is set up and managed correctly.

Demanding a lot of energy and research, SMSFs aren’t suitable for everyone. Some people thrive under the added responsibility, while others struggle.

Can you use your SMSF to buy property?

SMSFs can be used to buy investment properties and have become an increasingly popular choice for Australians in recent years.

A self-managed fund can even use borrowed monies to purchase a single asset, or a collection of identical assets that have the same market value.

This is often done through Limited Recourse Borrowing Arrangements (LRBA), which are driving the popularity of property purchases in SMSFs.

This specific method involves the SMSF trustees receiving the beneficial interest in the purchased asset, while the legal ownership is held on 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 jump in head first, you need to ask yourself:

1. If you use your SMSF to buy property, what sort of property should it be?

2. What do you do if you don’t have an SMSF?

3. Is it worthwhile setting up an SMSF to purchase property?

What are the advantages?

There are significant advantages to owning a property through a SMSF. First, your super fund will be taxed at 15 per cent, which is considerably lower than most people’s personal tax rates.

Second, your capital gains tax will also be discounted.

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 its pension phase, you don’t have to pay any tax on the sale.

However, there are a few things to bear in mind if you plan on setting up an SMSF specifically to buy property, whether residential or commercial.

SMSF residential purchases

It’s important to note that you can’t buy a residential property through your SMSF if you intend to live in it, or for any family member to live in.

There’s a condition that the SMSF trustee, as well as their relatives and the fund’s members, can’t benefit from the property.

In short, you can invest in a residential property, but only to rent it out to the market.

Don’t have enough savings?

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.

SMSF commercial purchases

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.

SMSF property rules

Investing in the property market using a self-managed fund allows you to dabble in all kinds of property, including residential, commercial and industrial.

However, you need to consider what is the best property class for you and abide by the rules.

Any property you invest in must:

1. pass the ‘sole purpose test’ meaning it is maintained for the purpose of retirement benefits for its members

2. not be lived in by a person or entity related to the member

cannot be bought from a related party

3. is not rented by a person or entity related to a fund member

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:

1. Is the property a good investment?

2. Will it appreciate in value?

3. What are the risks?

4. 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.