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Buying property through your SMSF

Using SMSFs to buy property has become increasingly popular among Australians in recent years, particularly since it became possible for SMSFs to borrow money to fund a direct property purchase.

Residential property

A residential property owned by an SMSF has some limitations as to who it can be leased to.

To buy property through your SMSF, the property must meet the following requirements:

Commercial property

A commercial property owned by an SMSF can be leased to a wider range of tenants than residential properties. Commercial property purchased for business purposes can be purchased from a member of the SMSF or a related entity. This allows small business owners to use their SMSF to purchase the premises from which their own business is run, enabling them to pay rent directly to their fund. This can be preferable to paying rent to an alternate landlord. However, keep in mind that rent must be at market rate and be paid promptly and in full at each due date.

SMSF borrowing

SMSFs can borrow money to purchase a property, however, the borrowing criteria for an SMSF is generally much stricter than regular property loans taken out by individuals. All loans must be undertaken through a limited recourse borrowing arrangement (LRBA). An LRBA involves an SMSF trustee taking out a loan to purchase a single asset, such as a residential or commercial property. Under the Superannuation Industry (Supervision) Act 1993, super fund trustees can use borrowed money to pay for regular repairs and maintenance. However, borrowed money under the LRBA cannot be used for property improvements or renovations that result in the acquirable asset becoming a different asset. This may include adding additional rooms to the property or completely renovating a room.

Tax consequences

Buying and renting property through an SMSF also comes with tax consequences. SMSF funds are required to pay 15% tax on rental income from properties purchased through the fund. However, properties held for over 12 months receive a one third discount on any capital gains made upon the sale, bringing any CGT liability down to 10%.

Expenses such as interest from loans, council rates, maintenance and insurance can be claimed as tax deductions by the SMSF.

As well as this, once SMSF members reach pension phase, any rental income or capital gains arising in the fund will be tax-free.

SMSF property costs

SMSF property sales often attract higher fees that can end up reducing your super balance. Fees and charges can include:

Business
advice

taxation
planning

compliance
services

News

Self-managed super funds (SMSF) aren’t just about financial investment

December 3, 2020

Individuals may be looking to opt for an SMSF because these provide entire control over where the money is invested. While this sounds enticing, the downside is that they involve a lot more time and effort as all investment is managed by the members/trustees.

Firstly, SMSFs require a lot of on-going investment of time:

Data shows that SMSF trustees spend an average of 8 hours per month managing their SMSFs. This adds up to more than 100 hours per year and demonstrates that compared to other superannuation methods, is a lot more time occupying.

Secondly, there are set-up and maintenance costs of SMSFs such as tax advice, financial advice, legal advice and hiring an accredited auditor. These costs are difficult to avoid if you want the best out of your SMSF. A statistical review has shown that on average, the operating cost of an SMSF is $6,152. This data is inclusive of deductible and non-deductible expenses such as auditor fee, management and administration expenses etc., but not inclusive of costs such as investment and insurance expenses.

Thirdly, investing in SMSF requires financial and legal knowledge and skill. Trustees should understand the investment market so that they can build and manage a diversified portfolio. Further, when creating an investment strategy, it is important to assess the risk and plan ahead for retirement, which can be difficult if one is not equipped with the necessary knowledge. In terms of legal knowledge, complying with tax, super and other relevant regulations requires a basic level of understanding at the very least. Finally, insurance for fund members also needs to be organised which can be difficult without additional knowledge.
Although SMSFs have the advantage of autonomy when it comes to investing, this comes at a price. Members/trustees need to invest time and money into managing the fund and on top of this, are required to have some financial and legal knowledge to successfully manage the fund.