It became possible for SMSFs to borrow money to fund a direct property purchase. And, SMSFs have become an increasingly popular choice for Australians in recent years.
If you are considering buying a property through SMSF, it is necessary to make sure you know what to do. Here is a guide to use your SMSF to buy a property.
What Is a Self-Managed Super Fund (SMSF)?
A self-managed super fund (SMSF) is a savings account for your retirement that you manage yourself, rather than one that is managed by a superannuation providers (such as Australian Super, REST Super etc). You will be able to pool your existing super balances to your SMSF and invest under your own discretions.
So, when considering investing in property through a self-managed super fund (SMSF), it is important to learn about SMSF property rules. Investing in the property market using a self-managed fund enables you to select all kinds of property, including residential, commercial, and industrial. However, you also need to consider what is the best option for you since different types of properties have different investment rules.
Residential Property Investment
It is important to make sure that you can’t buy residential property through your SMSF if you intend to live in it, or for any other trustee or anyone related to the trustees – no matter how distant the relationship.
You cannot invest in a residential property rented by you, or any other trustee or anyone related to the trustees, or any family members.
Please keep in mind that the SMSF trustee, as well as their relatives and the fund’s members, cannot benefit from the property invested through SMSFs.
Also, you cannot consider an existing residential investment property you want to transfer it into SMSF.
In short, you can invest in a residential property, but only to rent it out to the market.
Commercial Property Investment
Compared with the limitation of residential property investment through SMSFs, investing in commercial premises through an SMSF has some advantages.
Holding commercial properties in an SMSF can be open to all SMSF trustees. To buy a commercial property in an SMSF, a fund may apply for a specific SMSF loan. Nevertheless, the requirements are stricter than traditional lending with tighter loan to value ratios.
Many small business owners use their SMSF to buy business premises and then pay rent direct to the SMSF. Holding business premises within an SMSF can provide asset protection against any future claims or liabilities that could result from operating their business, which means if the business goes belly up, their properties are still safe. It is important to note, the rent paid must be at the market rate (no discounts) and must be paid promptly and in full at each due date.
Further, since the property is held in your SMSF, you can secure your business’s tenancy for the longer term. It will have benefits of asset protection.
What Benefits Can You Acquire?
Apart from some advantages of commercial property investment, there are also other benefits when you consider purchasing a property through SMSFs.
1. Tax Benefits
There are significant advantages to owning property through an SMSF. First, your super fund will be taxed at 15 per cent on rental income or 10% on capital gain (subject to CGT discount rules), which is considerably lower than most people’s personal tax rates.
Second, your capital gain tax will also be discounted if the properties are held for longer than 12 months.
If the property is purchased through a loan, the interest payments are tax deductible to the fund. If expenses exceed income there is a taxable loss that is carried forward each year and can be offset on future taxable income, but please keep in mind that any tax losses cannot be offset against your personal taxable income outside the fund.
2. SMSF Funds Can be Investing 100% into Commercial Premises
When investing in commercial properties, SMSF funds have the option of investing 100% into commercial premises if a member of the fund runs a business. This is an attractive advantage for small businesses who want to own the premises from which they run. Investors or businesses which already own a commercial property can contribute the property to the SMSF. But please note that transferring property may have capital gains, stamp duty and tax implications, so always get advice before making plans.
When you are thinking of leasing the property to a related party, it must be done on the same terms as it would with an independent third party. If you were leasing to an independent third party, a lease arrangement needs to be in place, clearly outlining the terms and conditions of standard commercial agreements. Market rate rent will need to be paid regularly into the SMSF bank, and the property will need to be periodically independently valued.
3. SMSF Funds Can Borrow Money to Invest
SMSF can be leveraged via loans to acquire assets. There are many loan products from different banks and private lenders, max LVR of 70% can be achieved. Borrowing to buy property through an SMSF is achieved through a limited recourse borrowing arrangement (LRBA).
When implementing leveraged strategies within SMSFs, it is important to document the assets correctly, especially if the asset being purchased is an interest in another asset-such as a tenants-in-common interest in a property.
Tips before Option
There are some tips you need to keep in mind before you decide to select this type of investment, for example:
Borrowing requirements for an SMSF is generally stricter than a normal property loan that you may take out as an individual. Also, there can be substantial fees and charges associated with the purchase, ownership, and subsequent sale of a property in an SMSF. Remember that loan repayments must be paid from your SMSF. So, you need to ensure the income in the super fund will cover these costs and allow for growth.
And you are responsible for Compliance. The ability to buy property in your SMSF with borrowings would be with some very strict rules and obligations that you may not be familiar with since they are not criteria that exist outside an SMSF.
Using SMSF to property investment is becoming more popular in Australia because it can be another investment choice to diversify your investment assets.
If you want more suggestions and seek assistance about SMSF, call BOA & Co. accountants in Chatswood on 02 9904 7886 and our SMSF Specialist will be pleased to assist you.