Property and your SMSF

Buying a property in an SMSF

Property has a place in any well-diversified investment portfolio and can offer good income and capital growth over the long term – it is also attractive to people who like to be able to see and touch their investment and potentially get involved in the management.

Buying property through your self-managed super fund (SMSF) can be a great way to build up your retirement savings; however it pays to think carefully about whether it is the right approach for you before embarking on the strategy.

Key Features

  • The SMSF can purchase any kind of property (including residential, commercial or rural)
  • Investing in property must be consistent with your SMSF’s investment strategy and the investment risk profile of its members.
  • The property is held in trust for the SMSF by the property trustee.
  • In the event of a loan default, the mortgage lender only has recourse to the security property. It cannot make a claim to any other of the SMSF assets.
  • The SMSF is entitled to the rental income from the property and all rent is paid directly to the SMSF.
  • The SMSF makes the loan repayments in the usual way to the mortgage lender. After the loan is repaid, legal ownership of the property is transferred to the SMSF.
  • The SMSF can pay out or reduce the mortgage loan at any time (subject to the terms and conditions of the home loan or mortgage)

Current Benefits (in brief):

  • Ability to own your business premises (but not operating assets) in the SMSF
  • Maximum 10% capital gains tax is payable on capital gain if the property is sold after a minimum of 12 months, and no capital gains tax is payable if the property is sold during pension phase.
  • Maximum 15% income tax on rental income. Income from the property can help pay off the mortgage loan.
  • Limited Recourse means that other assets are secure as the mortgage lender does not have recourse to the SMSF’s other assets in the event of default.
  • Interest expenses may be claimed as tax deductions by the SMSF which can potentially reduce your SMSF’s tax liability.

Current Restrictions (in brief):

  • The SMSF can purchase residential property but only from an unrelated party – i.e. must be arm’s length
  • The SMSF can buy “business real property” – i.e. property used “wholly and exclusively for business purposes” from a related party but it must be on an arm’s length basis for full market value.
  • You can’t stay or live in the property and neither can any friends or family members (however, you may lease “business real property” to a related party – provided the lease is on an arm’s length basis for full value).
  • Property is a large sum purchase with significant set-up costs attached, as well as sometimes higher fees involved in obtaining a loan through your SMSF – this all acts to reduce your super balance and may affect the funds ability to meet its cashflow and liquidity needs.
  • Borrowing or gearing your super into property must be done under very strict borrowing conditions called a ‘limited recourse borrowing arrangement’. A LRBA can only be used to purchase a single asset, for example a single residential or a single commercial property.
  • Most financiers will require you to have a corporate trustee in place for your SMSF to borrow funds.
  • Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
  • You can’t use borrowed money to renovate or make capital improvements to a property purchased through a SMSF while it is still under a loan.
  • If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the SMSF – not your regular income.
  • Running a SMSF is complicated and penalties for getting things wrong are high. Getting a professional to run it for you, while costly, is a way to help minimise mistakes.

The information above is a guide only and it is strongly recommended that you seek professional advice before purchasing a property through your super, particularly as the rules governing what can and can’t be done are subject to change, and the penalties for mistakes can be high.