Can You Invest in Property Using Your SMSF?
The short answer is yes! But there are there are a range of compliance requirements and regulations involved that you need to consider before deciding if this is the right investment approach for your fund.
Investing in a self-managed super fund property has become a popular strategy in Australia, offering SMSF members greater control and flexibility over their retirement savings. With the ability to invest retirement funds directly in real estate, many SMSF trustees are considering using their fund to purchase residential or commercial self managed super fund property to help them get ahead.
All your major financial decisions require some time and energy spent on educating yourself on the positives and potential drawbacks of each decision. So here’s some information you need to know about how self managed super fund property investment works and what’s involved if you want to use your SMSF to purchase real estate.
Firstly, What is a Self-Managed Super Fund?
Self-Managed Super Funds (SMSF) are a type of Australian superannuation fund managed by its members (two or more people) rather than a professional fund manager.
SMSFs give members greater control and flexibility over their retirement savings, allowing them to make their own investment decisions, including what they want to invest in and how much risk they’re willing to take on.
Beyond the versatility of this investment structure, they’re particularly popular amongst investors within higher tax brackets, as the Australian Taxation Office (ATO) only taxes SMSF income at a rate of 15%.
For this strategy to work, you must comply with extensive regulations, as these investments have a direct connection to your retirement fund.
What Are The Compliance Requirements?
Generally, these requirements include accurate record keeping, fund reporting, and trust deed compliance, all of which must be reported annually to the Australian Tax Office. Additionally, SMSF trustees are responsible for adhering to general superannuation law and must understand their obligations before investing.
These obligations include:
Satisfying the sole purpose test: trustees must ensure that all decisions made with the fund are solely to provide retirement benefits to members and not for any other reasons such as tax minimisation or lifestyle purchases.
Executing administration duties: includes completing a compliant trust deed, signing a trustee declaration, registering the SMSF with the Australian Business Register, establishing an investment strategy, considering insurance cover, preparing annual financial reports and tax returns, and having an annual audit by an independent auditor.
Adhering to investment rules: not purchasing property from any fund members or member relatives; not using the property as a main residence; and not renting the property out to fund members or related parties.
What Are The Tax Benefits of SMSF Investing in Property?
SMSF property investment has several benefits, including being a tax-effective investment strategy.
The ATO only taxes the net rental income from your SMSF property at a rate of 15%, making an SMSF property investment a tax-effective option, especially for individuals who fall into a higher income tax bracket.
And there are a few other added tax benefits, including:
Any rental income you receive into the fund during the pension stage is tax-free.
Holding an investment property in an SMSF for over 12 months makes it eligible for a discount on your capital gains tax liability, reducing your taxable gain to only 10%.
If you take out a loan to purchase the investment property, the interest you pay will be tax-deductible.
And What Are The Cons of SMSF Investing in Property?
As with any investment, there are also some potential drawbacks to consider:
Complex regulations: SMSF property investment is subject to strict regulations and compliance requirements, making the process complex and time-consuming.
Higher costs: Setting up and maintaining an SMSF can be more expensive than traditional superannuation funds.
Responsibility: SMSF members manage their own investments, including property, and ensure compliance with regulations.
Can Your SMSF Borrow Money To Purchase a Residential Property?
Yes, your self-managed super fund can take out a mortgage to finance your rental property purchase. However, as the government understands your retirement fund is essentially taking out debt, a limited recourse borrowing arrangement (LRBA) must be in place.
An LRBA ensures that the lender can only recover the debt from the specific asset being purchased (i.e., the investment property) and can’t seek repayment from the SMSF’s other assets if you default on your loan repayments. So, this structure allows SMSFs to use their superannuation savings to purchase investment properties without putting their entire fund at risk.
Can You Purchase Commercial Property with Your SMSF?
SMSF investment is not only limited to residential properties. If you believe it’s more lucrative to branch out into the commercial sphere, you can do so, provided you satisfy the sole purpose test.
And unlike residential investments, the rules to purchase property in the commercial space show a slight relaxation.
But that doesn’t mean you can set the rental rate at a more favourable value for your business. Investing with your super fund aims to generate more retirement income. So, there are rules in place that ensure the rent you pay reflects the true property value of similar rental properties on the market.