A Simple Guide to SMSF Property Investment
Understand the Rules
Self-Managed Super Fund (SMSF) property investment can be a smart way to build wealth for retirement. However, it’s crucial to understand the rules and steps involved to ensure compliance and maximize your investment’s potential.
The Sole Purpose Test: The primary purpose of an SMSF must be to provide retirement benefits to its members. Therefore, to remain complaint with the ATO requirements, if you buy a property through the SMSF, your only goal must be to make a financial gain. Additionally, the property:
- Cannot be acquired from a related party of a member.
- Cannot be lived in by a fund member or any related parties.
- Cannot be rented by a fund member or any related parties.
Transactions conducted at ‘arms-length’: As such, you would not be able to rent out the SMSF property to a child for an artificially low rent. If the ATO believes you are in violation of this rule, the income earned by your SMSF would be taxed at the highest marginal rate (45%) rather than the concessional 15%.
Finance the purchase with a limited recourse borrowing arrangement: If you are borrowing money to buy the SMSF property, you must purchase through a limited recourse borrowing arrangement rather than a standard (full recourse) home loan.
Restrictions on renovations and improvements: While you can renovate and made improvements you are not allowed to borrow money to fund the improvements which puts them out of reach for many investors.
Meet ongoing compliance obligations: Some ongoing compliance obligations will include: lodging annual returns with the ATO, conducting annual reviews of the SMSF’s strategy, maintaining records for required timeframes and reporting changes in the SMSF details such as banking information to the ATO. Partnering with experienced SMSF professionals including a buyers agent, will help you meet all the rules and manage your ongoing compliance obligations.
Advantages and Disadvantages of SMSF Property Investment
Advantages
- Before retirement capital gains and rent earned by your SMSF are taxed at only 15 % or 0% once you reach the pension phase. This is in comparison to 45% when the same property is held outside of super. Selling the SMSF property in the pension phase means capital gains are taxed at 0% (assuming you have held the property for 12 months).
- You have direct control of how your money is invested rather than surrendering control to a superannuation fund.
- If you use your SMSF to buy a property and hold it until after you retire, you’ll pay no tax on the capital gains if you sell or rent or on the rent if you continue to own it.
- Participation of more than one family member in the fund.
- Asset Protection: in the event of a legal dispute or bankruptcy, it’s more difficult for other parties to seize your properties held in an SMSF.
Disadvantages
- You are not able to live in the property and neither can families.
- All decisions and responsibilities for managing the SMSF rest with the trustee. Making good decisions will determine your future retirement.
- There are costs involved in setting up an SMSF and there can also be higher fees involved in getting a loan through your SMSF.
- Running your SMSF can be complicated but partnering with a professional can ensure you are fully compliant with all rules and regulations.
SMSF Property Investment can be profitable however its important you obtain professional advice to determine whether it is the right choice for you.
Our SMSF Property Investing Guide simplifies the information on this topic for anyone looking to enhance their portfolio using this method. You can download it here.
