While property is a popular asset class to invest in for many using a self-managed super fund (SMSF) – led in no small part by the appeal of ‘bricks and mortar’ as a physical asset – it is not quite as simple as buy, set and forget. It is crucial that investors seeking to realise investment returns from this asset class do so lawfully and effectively by first weighing up the benefits and drawbacks.
Property as an investment
One of the key advantages of owning an SMSF is the ability to use funds to invest in real estate. Property investment has for decades been a key driver of wealth in Australia, and is another plank for developing a diversified investment portfolio. Property is viewed by many as a relatively safe investment option, given that it is a physical asset that will always be in demand and it tends to be a much less volatile asset class than shares, for example.
Property also has the potential to provide 2 sources of revenue to drive growth in your retirement savings.
• Rental returns can provide an ongoing source of cash flow. Rental incomes can be used to fund other investment purchases and negatively geared properties allow for tax breaks across the SMSF’s earnings.
• Capital growth can be realised when the property is sold. While still subject to tax, properties held long-term by an SMSF can yield hefty returns that may not be matched by other investment classes.
Restrictions on investment
There are specific regulations in place for the purchase of property with an SMSF. ASIC’s MoneySmart has a comprehensive guide to property investment restrictions. The majority of these restrictions are related to the occupation of residential properties. As with all superannuation-funded investments, properties can only be used for purposes of investment and therefore, will have occupation restrictions. Residential properties will face occupation restrictions whereas commercial properties tend to face less. SMSF-owned residences cannot, for instance, be occupied or rented by any of the SMSF’s trustees or parties relating to them, nor can a property established as a holiday home be used by any trustee or family member.
However, these occupation restrictions are largely unique to residential properties. Commercial properties, on the other hand, can be owned by an SMSF and tenanted to a business operated by a trustee or family member. This means that the property type is also another factor that needs to be considered when using SMSF to invest in property.
Funding property acquisition
How you fund the property will depend on how much your SMSF has available to invest. If there is enough cash available, the fund can purchase the property outright. Things are less straightforward when a loan is required to fund part of the property.
Unlike the purchase of an owner-occupied property with the help of a mortgage, using an SMSF to fund a property acquisition requires a particular loan agreement known as a limited recourse borrowing arrangement. This facility places certain restrictions on the use of borrowed funds, such as that loans can only be used to purchase and maintain a property and not to carry out improvements.
Additionally, ASIC points out that tax offsets can only be used against the fund’s earnings, not your own personal income, and that enough cash needs to be available within the fund to service loan repayments and ongoing property maintenance expenses.
While there are many benefits to using an SMSF to invest in property, care must be given to when adhering to the strict regulations in place in order to ensure the investment endures. Be sure to investigate all types of property to invest in to achieve the best returns for your superannuation.
ASIC’s MoneySmart Investing: https://www.moneysmart.gov.au/investing/property
ASIC’s MoneySmart Superannuation and Retirement: https://www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super-fund-smsf/smsfs-and-property