Tax and legal advice
Mark Chapman

Buying property through an SMSF

By Mark Chapman

Investing in property though a self-managed super fund has grown in popularity in recent years, particularly since it became possible for SMSFs to borrow money to fund property purchases.

What with lots of spruikers selling supposedly foolproof property schemes, and plenty of opportunities for the unwary to get into trouble, this is an area where you really do need to make sure you know what you’re getting into. Here is our list of do’s and don’ts for investing in property through your SMSF:

  • The property must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
  • Property purchased through an SMSF cannot be lived in by you, any other trustees or anyone related to the trustees, no matter how distant the relationship. It also cannot be rented by you, any other trustee or anyone related to the trustees. So, buying a holiday home in your SMSF and living there during the summer isn’t allowed!
  • The property also must not be acquired from a related party of a member
  • Until the SMSF property loan is repaid, you can’t make any improvements to the property (other than general maintenance). That makes it impossible to purchase a “renovator's delight”
  • There can be substantial fees and charges associated with the purchase, ownership and subsequent sale of a property in an SMSF. These will eat into your super balance so you need to ensure the income into the super fund will cover these costs and allow for growth. The costs include:
    • Upfront fees
    • Legal fees
    • Advice fees
    • Stamp duty
    • Ongoing property management fees
    • Bank fees

Typically, borrowing to buy property through an SMSF is achieved by way of a limited recourse loan. This means that the borrowing is made through a trust (often called a bare trust), which has the legal title in the property. Beneficial ownership rests with the SMSF, which then collects all of the rental income on the property. The reason for this arrangement is so that the lender can take charge of the property if the SMSF fails to keep up with the loan.

Borrowing criteria for an SMSF are generally much stricter than for a normal property loan which you might take out as an individual and come with higher costs, which need to be factored into account when working out if the investment is worthwhile.

Remember that 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. The SMSF can fund the loan repayments through rental income on the property and through superannuation contributions into the fund.

Commercial property
One of the most popular ways to invest in property is through commercial property.

Many small business owners get their SMSF to purchase their business premises and then pay rent direct to the SMSF. It’s important to get this right; the rent paid must be at the market rate (no discounts!) and must be paid promptly and in full at each due date.

The investment must also satisfy the overarching function of the SMSF which is to provide a retirement fund for the members. Getting the SMSF to purchase the building might make sense for your business but does the building represent a good investment for the SMSF? Consider the yield and the expected growth in value and if the property doesn’t shape up, you may need to reconsider.

And the tax consequences?
If you buy a property through an SMSF, the fund will pay 15 per cent tax on the rental income from the property. On properties held for longer than 12 months, the fund receives a one-third discount on any capital gain it makes upon sale, bringing any CGT liability down to 10 per cent.

Once fund members start receiving a pension at retirement, any rental income or capital gains arising in the fund will be tax free.

Note also, that if you make a loss on your property rental, any tax losses cannot be offset against your personal taxable income outside the fund.

 

 

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About the Blogger

Mark Chapman

Mark Chapman

Mark Chapman is the tax communications director at H&R Block. 

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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune in to this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

Son is able to write all types of residential and commercial property loans.<\/p>\r\n

In this episode of Property Showcase, head of mortgages at Rethink investing Son Pham joins host Tim Neary to unpack how an investor should approach getting a mortgage in place with banks tightening down on serviceability.<\/p>\r\n

Hear from\u00a0Son\u00a0about:\u00a0<\/p>\r\n

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  • The pitfalls that he has seen people get into<\/li>\r\n
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    Whether it\u2019s building a successful property portfolio or investing in one of their Development Funds, Open Corp can help you through every stage of your investment journey. The team has 40 property specialists who collectively have been involved in over $4 billion worth of property transactions and the acquisition of more than 8000 homes and investment properties.<\/p>\r\n

    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

    In this episode, hear from\u00a0Michael\u00a0about:\u00a0<\/p>\r\n

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Mortgages in a tighter lending economy and why Brisbane is a good option
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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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A property investment plan years in the making
object(stdClass)#1194 (52) {
  ["id"]=>
  string(5) "18287"
  ["title"]=>
  string(75) "Regional Victoria showing up Melbourne in price performance, new data finds"
  ["alias"]=>
  string(74) "regional-victoria-showing-up-melbourne-in-price-performance-new-data-finds"
  ["introtext"]=>
  string(139) "

Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds

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