Self-managed super funds (SMSFs) remain a popular retirement funding option for Australians due to greater control and investment flexibility. Many SMSF members have also gone on to harness an SMSF’s full potential with property investment. In this post we explore why you may want to use your super to buy property through an SMSF and how the process works.
Why buy property with super?
From greater investment choice to reduced tax obligations, SMSFs can deliver many benefits — and buying a property with super is no different. Some of the key benefits of using your super to buy property through an SMSF include:
- Lower tax obligations — Transactions made inside an SMSF are taxed at 15%, compared to the standard 45% for investments made outside the fund. You also may be eligible for certain tax deductions once you’ve paid off your SMSF loan.
- Reduced Capital Gains Tax (CGT) — Buying an investment property with super can lower your tax obligations, particularly CGT. By holding the property in your SMSF for 12 months or more, your CGT rate is reduced to 10%, a significantly lower figure than the tax you would pay if you held the asset outside your super. This helps you keep more money invested in your SMSF to grow your retirement savings.
- Default protection — Unlike a traditional home loan, an SMSF loan protects SMSF members and their property. If you default on your repayments, the lender cannot come after you or seize your property. For many SMSF investors, this ensures their assets are well protected.
- Increased investment opportunities — Using your SMSF to purchase property means having greater access to investment opportunities you may not have been able to afford outside the fund. This also helps you diversify your investment portfolio and spread your risk.
Buying a property with super — what are my loan options?
You might be surprised to know that using super to buy an investment property isn’t that different from purchasing a property the ‘traditional’ way. You will still need to approach a lender for an SMSF property loan, though a set of conditions must be met before you are approved.
When acquiring a property through an SMSF loan, the property in question must pass the ‘sole purpose’ test. This means that the property must solely be used as an investment and cannot be lived in or rented by a fund member or related party. Any income generated from the property also cannot be pocketed and must be funnelled into your SMSF. For many SMSF members, this can be a major investment limitation, as the property can only be purchased to provide investment income and cannot be used as a place of residence.
If you are approved for an SMSF loan, a custodian will use the property as collateral, and the loan will be listed as a limited recourse borrowing arrangement (LRBA). This means a lender cannot claim the property or any other asset held in the SMSF if you default on the loan. Once the loan is paid off, the legal title of the property is transferred from the custodian to the SMSF.
Other considerations for SMSF property investment
Can your SMSF cover the upfront and ongoing expenses?
When buying a property with super, you must ensure the SMSF has enough funding to cover your repayments and other costs that come with property ownership, such as rates, home insurance premiums, repairs and other maintenance. You will also need to factor in other important fees, such as legal fees, stamp duty, the loan’s upfront fee and other bank fees.
Will you have time to manage your SMSF?
Managing an SMSF requires many ongoing administrative duties — a task some Australians may not be prepared or equipped to do. Unlike other super accumulation funds, you are the trustee of your SMSF and therefore are responsible for its management. Between managing the fund’s ongoing operation, specific regulations and laws govern SMSFs that must be adhered to. As the trustee, you are also responsible by law to prepare and implement an investment strategy for your SMSF, as well as document these investment decisions and monitor their performance.
Is your property purchase compliant with current SMSF regulations?
SMSF loans are a unique product and are not offered by many lenders. Getting approved and keeping the process legal also heavily depends on the property in question passing the ‘sole purpose test’ — it cannot be acquired for any purposes other than investment. Financial Spectrum has in-house mortgage brokers specialising in SMSF loans and can position you in the best light to get loan approval.
Financial Spectrum — professional SMSF property investment advice
SMSF property investment can be highly rewarding, but also a complex and time-consuming endeavour, filled with several financial, legal and administrative tasks. It’s therefore highly recommended that you seek professional advice. Utilising the experience of a financial advisor can simplify the process and ensure you remain compliant.
The experienced team at Financial Spectrum can guide you through the process and provide you with unbiased advice to ensure you have a seamless experience and get the most out of your investments. Our team of in-house accountants and mortgage brokers have specialised skills in SMSF property investment and can ensure you get the most competitive deal based on your financial needs and circumstances.
We can help you unlock financial freedom and achieve your retirement goals. Book an appointment today to learn more about our SMSF investment services, or check out our comprehensive e-book that guides you through the process plus shares insights and tips on what SMSF property investment may look like for you.