Future Assist - Property and SMSF

The holdings of traditional retail or industry super funds are typically dominated by shares and fixed interest securities. If you are in a position to establish a SMSF, then the door could open up to you to purchase residential or commercial property through your fund. Commonly, we see many people's traditional funds in shares and fixed interest for various reasons, but the majority being 'its just easy to manage' or the fund has been neglected and the client has no idea what is going on with their superannuation.

Here at Future Assist, we see the reason many clients look at purchasing property through a SMSF, is that it provides unique taxation benefits (compared to owning property outside a SMSF), and additional diversification opportunities (compared to funds that invest mainly in shares, or property trusts), among other benefits.

The main advantages of purchasing property through a SMSF are tax related.

Any rental income or capital gains are taxed far lower than when investing outside of an SMSF; these rates are likely to be much lower than your marginal tax rate which is what you would be looking at outside your SMSF.

Furthermore, if you hold the property until after you retire (when your super fund moves into the pension phase), you will not be required to pay any tax on ongoing rent, or capital gains if you sell the property. For this reason, property investment within a SMSF may be suited to those who plan to retire in the short- to medium-term.

There are other benefits to investing in property through a SMSF. While the advantage of negative gearing is limited to income earned within the fund, any income contributed to the SMSF to support the cost of a property (up to a limit of $25,000) is concessionally taxed – which may be equal to any negative gearing benefit achieved by holding the property in your name.

Buying a property within a SMSF allows you to use the extra income of the Superannuation Guaranty (paid by your employer) to contribute towards property or loan costs. SMSFs also provide excellent asset protection for properties because they are purchased through what is called a Limited Recourse Borrowing Arrangement (LRBA).

It is possible for a SMSF to borrow to purchase property, provided certain conditions are met.

Section 67 (4A) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) from September 2007 provides that SMSFs can borrow under the following conditions:

There are various non-recourse loan products available that meet the requirements of SMSF lending, although standard bank loans will not suffice. 

There are various criteria in relation to the purchase of property by a SMSF that must be adhered to. Non-adherence can carry strict penalties, highlighting the benefits of working with professional advisers that know SMSF.

For example, it is not possible to purchase just any type of property. There are a number of requirements, including that of “arms length transactions”, which ensure that any purchase is a commercial transaction.

Further, it is not possible for a trustee to occupy a property purchased by a SMSF. However, a SMSF can buy a property that the investor intends to live in after retirement. This is possible if you transfer ownership of the property out of the fund to you after you retire.

When a loan is fully repaid, the SMSF is entitled to have the legal title of the property transferred to it. Depending on how the SMSF is constructed, this transfer should be possible without incurring tax, GST, or stamp duty liabilities (other than nominal) as the SMSF will already be the beneficial owner.

As you can see, there are many benefits to buying property with your superannuation, however none of these should be considered lightly or without professional advice. Speak to a licensed financial planner to ensure that you look at the risks and asses the investment in relation to meeting your retirement goals.

Future Assist are SMSF and Retirement planning specialists. Speak to an Adviser today: 1300 118 618

**IMPORTANT: The information above is general in nature and has not taken into consideration your personal goals, financial situation or circumstances. We recommend that prior to making any decision regarding your financial circumstances, investments, superannuation, SMSF or direct property investment, you should consult a licensed financial planner or adviser.

Future Assist Financial Services Group Pty Ltd (ABN 24 151 337 843, AFSL No. 413674)