A Self Managed Super Fund (SMSF) is a way of preparing yourself for a financially secure retirement by managing a pool of funds and assets alongside up to three other members.
These other members are usually also trustees, meaning you are each equally responsible for the maintenance of the fund, compliance with tax and super laws and for the decisions regarding the financial benefit of the fund.
SMSF property investment with borrowings
The laws that govern SMSFs allow fund members to access loans to supplement their fund value for the purchase of investment property. However these differ from traditional mortgages. The loans available to SMSF owners are Limited Recourse Borrowing Arrangements. This protects other assets in your fund, should – for any reason – your fund default on the repayments. That said, while it’s your SMSF that takes out the loan, the property is actually purchased by a separate holding trust, and full ownership is not transferred to your SMSF until the loan has been repaid.
Types of SMSF property investments
An investment property can be an attractive asset for capital growth. You are permitted to purchase both residential and commercial property, with or without borrowings – though there are strict laws surrounding the use of such properties. Neither you nor any ‘related party’ can live in a residential property purchased by your SMSF. Commercial properties bought using your SMSF, however, can be leased to any party – including you or your relatives and associates – so long as the rent is paid at the commercial rate.
Tax and risk benefits
As an SMSF owner, investment in property should be considered carefully. With access to loans to supplement your fund, the option of real estate investment is now much more accessible. By diversifying your fund assets with property purchases, you can manage the risk across your portfolio while maintaining opportunities for growth. Timing your investment around favourable interest rates can see your portfolio grow and earn higher capital growth yields in future – providing your returns outweigh your borrowing costs.
Much like individual property investors, SMSF investors can take advantage of negative gearing. This allows you to claim a deduction for borrowing expenses. Consider your pension phase, too. Rental income paid to your SMSF is only taxed at 15%, which will reduce to 0% if you commence a pension after preservation age. When the time comes to sell your property, you’ll be exempt from capital gains tax once you’ve entered the pension phase, so consider the timeline of your super strategy in your decision making.
Make sure property investment suits your strategy
Despite these benefits, property investment through an SMSF isn’t for everybody. Failure to comply with superannuation laws can result in criminal consequences for all trustees, so it’s important to get the correct legal advice.
Be wary of the full restrictions around qualifying properties. Known as the ‘sole purpose test’, your investment will be assessed as to whether its sole purpose is to benefit your retirement fund. You can’t be cheeky and use your superfund to pay off your own home or a holiday home, nor can your SMSF purchase a property you or a friend/relative already owns. The benefits are generally far more long-term than investing in property outside of your superfund. If what you’re looking for is an investment with immediate access to yields, or you’re looking for a property to holiday in as well as rent out for extra income, SMSF property investment likely isn’t the strategy for you.