Investing in a self-managed super fund property has become an increasingly 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.
But while property investment through an SMSF can be a lucrative strategy for some, there are a range of compliance requirements and regulations involved that you need to understand before deciding if this is the right investment approach for your fund.
As with any major financial decision, educating yourself on the positives and potential drawbacks is crucial.
So here’s what 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.
What is a Self-Managed Super Fund?
Self-Managed Super Funds (SMSF) are a type of Australian superannuation fund managed by its members 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.
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.
Tax Benefits of SMSF Investing in Property
Aside from the added control and flexibility, SMSF property investment has several other benefits, including being a tax-effective investment strategy.
As previously noted, 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.
But 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.
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.
Are You Allowed to 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. So, for example, if you run a business and are looking to purchase your business premises as an investment, you can do so through your SMSF and pay the rent directly into your fund.
Of course, that doesn’t mean you can set the rental rate at a more favourable value for your business. Remember, 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.
How Does Tax Depreciation Work with SMSF Investment Properties?
Like any other property investment, self-managed super fund members can claim depreciation deductions for capital works and plant and equipment items in their SMSF property.
The ATO allows property investors to claim a tax deduction to offset the decline in the value of a building and its assets over time. By claiming these deductions, property owners, including SMSF members, can reduce their taxable income, which can help to improve their overall cash flow and increase their return on investment.
You must contact a quantity surveyor and order a tax depreciation schedule to claim depreciation.
A tax depreciation schedule, also known as a quantity surveyor’s report, is a detailed report that outlines the eligible depreciation deductions for a property. In addition, the report provides information on the various assets within the property and their respective depreciation rates.
Here at Duo Tax, our quantity surveyors can ensure you receive a comprehensive and accurate tax depreciation schedule tailored to your SMSF’s investment property.
SMSF property investment can offer significant benefits, but it is important to understand the regulations, compliance requirements, and potential drawbacks. But, as with any investment strategy, it is crucial to seek professional advice and carefully consider all options before making a decision.
It’s even more imperative that you reach out to a professional SMSF advisor if you’re considering using it as a vehicle to buy property, given the stringent reporting and compliance obligations.
If, after receiving the appropriate advice, you decide to go ahead with the SMSF investment and you would like to establish whether it’s worth your while to order a depreciation, you can:
- Access our FREE depreciation calculator to determine your savings
- Contact one of our qualified Quantity Surveyors to determine if your property qualifies and get a FREE quote
- Allows us to organise your personalised depreciation schedule
- Start saving thousands of dollars!
Can My Self-Managed Super Fund Buy Property?
Yes, your self-managed super fund (SMSF) can purchase property as an investment. Some key things to keep in mind are:
- The property must be held in trust for the SMSF. The trust deed should state that the property is held for the sole purpose of providing retirement benefits for fund members.
- All members of the SMSF must agree to the purchase.
- The SMSF can borrow to purchase property, but strict rules apply. The loan must have limited recourse, and the property held in trust must serve as security for the loan.
How Much Deposit Is Required for SMSF Property?
There is no set minimum deposit required for an SMSF to purchase property. However, SMSFs are generally limited to borrowing up to 80% of the property value. This effectively means a minimum deposit of 20% of the purchase price. A higher deposit will reduce borrowing costs.
What Is the In-House Asset Rule for Self-Managed Super Fund?
The in-house asset rule limits the percentage of assets an SMSF can invest in related parties. No more than 5% of the total SMSF asset value can be loaned to or invested in related parties, such as fund members, their relatives, and associated businesses. This includes property purchases. Fines apply for breaching the in-house asset rules.
Can You Transfer Property to a Self-Managed Super Fund?
Yes, you can transfer personally owned property into your SMSF. The property must be transferred at market value, supported by an independent valuation. Stamp duty may apply on the transfer. The SMSF must have sufficient cash reserves to complete the purchase from you. Strict rules govern related party transactions to avoid conflicts of interest.
Does an SMSF Pay Capital Gains Tax?
Yes, an SMSF is generally required to pay capital gains tax (CGT) on any net capital gains it realises from selling assets like shares or property. According to ATO rules, an SMSF must include all capital gains and losses as part of its assessable income each year. If the total capital gains exceed the capital losses, this results in a net capital gain that is subject to tax at the concessional rate of 15%