Holding more control and flexibility over your investment decisions is undoubtedly one of the key benefits of running a self-managed super fund over a traditional APRA-regulated fund. For those SMSF trustees wishing to take advantage of the ability to purchase property within their SMSF, it's crucial to understand the requirements around SMSF property investment.
We cover what you need to know about buying property with an SMSF.
Just as there are numerous rules and compliance obligations with running a self-managed superannuation fund, there are rules that must be adhered to when purchasing property through an SMSF.
Some of the most important rules around SMSF property ownership include:
The sole purpose test applies to all funds, from industry funds to self-managed super funds. The sole purpose test ensures that all SMSF trustees make decisions that are in the best interest of providing retirement benefits to its members.
In terms of purchasing property through an SMSF, important restrictions apply to ensure that the fund can comply with the sole purpose test:
The property cannot be obtained from a relative of a member or a fund member themselves. Many people wrongly assume they can take an existing residential property they own and put it into their SMSF — this isn't the case.
For residential properties, they can't be rented to (or lived in by) any related parties to the fund (including family members).
If the property purchased is a commercial premises, it can be leased to related parties on the condition that the property is being used 'wholly and exclusively' in a business. You must also charge market rate rent for the business premises, and cannot charge 'mates rates'.
As the SMSF trustee, you are responsible for all fund compliance, including tax laws and ensuring that all fund decisions are solely providing retirement benefits to the fund members.
Generally speaking, unless it's to repair the property back to the standard you purchased it in, you can only make alterations or improvements to the property once you've paid off the SMSF loan. Any other modifications must be funded using available cash within the SMSF.
Running a self-managed super fund comes with great responsibility in choosing an appropriate investment portfolio for the fund members. Before you can deliberate over investment selection, the fund's investment strategy must first be determined.
If you're thinking of adding a residential property or commercial property to the list of your fund's assets, then you'll need to review your investment strategy to ensure that the property investment remains in line with the strategy. If not, an investment strategy update will need to take place.
Assessing the correlation between the intended property and the fund's remaining assets, as well as considering the resultant asset allocation and whether members are soon to switch into pension phase, can all affect your decision to make a direct property purchase under your self-managed superannuation fund.
The Australian Taxation Office sets the compliance requirement that in order to borrow money for property investment, an SMSF must create a separate property trust through a limited recourse borrowing arrangement (LRBA). LRBAs are only offered by certain speciality lenders in Australia. One of the key features of an LRBA is that the property is kept in a separate trust, so a lender only has a legal claim over the property, and not your other superannuation assets in the event that you default on the loan.
Part of the SMSF investment strategy review should be ensuring that your fund can meet liquidity requirements. Lenders of SMSF loans typically need at least 10% of the property value as liquid assets. For most funds, this means that after considering all property expenses, at least 10% of the fund must be left in cash assets.
Typically, lenders of limited recourse borrowing arrangements will offer a maximum loan-to-value ratio of 70% for SMSF borrowing. SMSFs need to ensure that they have sufficient funds to cover at least 30% of the property value as a deposit, on top of covering other expenses such as legal fees, stamp duty and additional lender fees that cannot be built into the loan amount.
Like most other investments, there are tax implications when you buy a property in an SMSF. Naturally, one of the tax benefits of SMSF property ownership is that all the income is taxed at the superannuation tax rate of 15% (compared to when you buy residential property outside the superannuation environment, where it's taxed at your marginal tax rate).
One of the other potential tax benefits is that properties held for over 12 months can access a one-third discount on any capital gain, meaning that the capital gains tax liability is reduced down to 10%.
If the property is purchased through a loan (as most are), the interest payments are tax deductible against the rental income received. If the expenses exceed the income received, that taxable loss can be carried forward to offset future taxable income from the property.
Everything from loan repayments to property management costs must come from the SMSF bank account. Similarly, any rental income generated from the property must be paid directly into the SMSF bank account.
Many compliance differences exist between residential properties and commercial real estate when purchased through an SMSF. When looking at your potential income yield and capital growth potential, SMSF trustees should also consider the myriad of compliance requirements associated with both property types.
In the quest to curate a portfolio of the best SMSF investments, SMSF trustees often look to investment technology to assist in researching markets. HALO Technologies builds world-leading investment technology for all investors. Discover how you can grow your retirement savings using HALO Technologies.
All information contained in this publication is provided on a factual or general advice basis only and is not intended or be construed as an offer, solicitation, or a recommendation for any financial product unless expressly stated. All investments carry risks and past performance is no indicator of future performance. Before making an investment decision, you should consider your personal circumstances, objectives and needs and seek a professional investment advice. Opinions, estimates and projections constitute the current judgement of the author as at the date of this publication. Any comments, suggestions or views presented in this communication are not necessarily those of HALO Technologies, Macrovue or any of their related entities (‘we’, ‘our’, ‘us’), nor do they warrant a complete or accurate statement.
The opinions and recommendations in this publication are based on a reasonable assessment by the author who wrote the report using information provided by industry resources and generally available in the market. Employees and/or associates of HALO Technologies or any of the other related entities may hold one or more of the investments reviewed in this report. Any personal holdings by HALO Technologies or any of the other related entities employees and/or associates should not be seen as an endorsement or recommendation in any way.
Get the latest insights and hot tips delivered right to your inbox
HALO Technologies Pty Ltd ABN 54 623 830 866 is a Corporate Authorised Representative No 1261916 of Macrovue Pty Ltd ABN 98 600 022 679 AFSL 484264. Macrovue Pty Ltd is a wholly owned subsidiary of HALO Technologies Pty Ltd.