For would-be property investors keen to build an investment property portfolio, buying through your self-managed superannuation fund (SMSF) can open the door to a wealth of new opportunities.
But be warned – buying residential investment properties through your SMSF comes with strict rules and regulations, so before you commit, talk to your accountant and experienced financial planner to make sure it’s the right decision to suit your own individual financial circumstances and long-term wealth-building goals (and your mortgage broker to make sure your fund can afford the purchase).
To buy residential property through your SMSF, the rules you must comply with include:
- Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- Must not be acquired from a related party of a member
- Must not be lived in by a fund member or any parties related to a fund member
- Must not be rented by a fund member or any parties related to a fund member
As well as using your SMSF to purchase a residential property, you can also use your SMSF to purchase your business premises. Unlike residential property, purchasing business/commercial premises allows your business to pay your rent directly to your SMSF, at the current market rate.
For more information, visit the website for the Australian Taxation Office’s and explore the section on self‑managed super funds.
Costs of Buying Property Through Your SMSF
Buying any property through your SMSF has many fees and charges. It’s important to talk to an accountant with proven experience in SMSF property investment to get the full picture, as these fees can add up and will impact your super balance.
Before buying property through your self-managed super fund, crunch your numbers to understand:
- Up-front fees
- Legal fees
- Advice fees
- Bank fees
- Ongoing property management fees
- Stamp duty
Use trusted advisers and be aware that if you find yourself in a network of adviser who recommend each other’s services, you may be getting slugged for unwanted fees. Seeking independent advice is always recommended to be sure you understand every aspect of your investment decisions and what it means for your future superannuation balance.
Anyone advising on SMSF-related investment must have an Australian Financial Services (AFS) licence. Visit the ASIC Connect’s Professional Registers to do your own due diligence and ensure your advice is from a professional, reliable source.
Borrowing or gearing your superannuation into property investment has to be done under extremely strict borrowing conditions, known as a ‘limited recourse borrowing arrangement’.
This can only be used to purchase a single asset, such as a residential or commercial property. Before you commit to buying a geared property investment, it’s vital to assess whether the investment is consistent with the fund’s risk profile and investment strategy.
Geared SMSF property risks can include:
- Higher costs – Because SMSF property loans are typically more costly than other property loans, these additional costs must play an important part of your investment decision to see if the positives outweigh the potential negatives.
- Cash flow – Because loan repayments must be made from your SMSF, it’s critical that your fund always has sufficient cash flow to meet the loan repayments.
- Cancellation is difficult – Taking shortcuts or receiving bad advice can mean that your SMSF property loan documentation and contract is not set up – something that can cause massive issues and the potential for substantial losses to your SMSF.
- Tax losses – Any tax losses related to the property purchased through your SMSF can’t be offset against your taxable income outside the fund.
- No property alterations – Until your SMSF property loan is paid in full, no alterations that change the character of the property can be made.
With investment in residential real property increasing – from a small 0.5 per cent of all SMSF assets in 2004, to 4.18 per cent ($28.2 billion) as of March 2017 (based on the current ATO figures) – it reveals a 3.7 percentage point increase in residential property investment and is something that some large super funds see as a sign pointing to the existence of a property bubble. In all likelihood, allocation to property may increase if more SMSFs choose to use borrowed money, so weighing up what’s right for you is a decision that should always be well-researched and fully understood to help you protect your financial security for a happy, healthy (and wealthy) retirement.
For advice about purchasing property through your SMSF, our team of mortgage broking specialist at Lending Specialists can help.