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Using a Self-Managed Super Fund to Buy Property

You may be aware of Australians using their Self-Managed Super Fund (SMSF) to purchase property – something that has gained popularity over the years. When structured correctly, and undertaken in the right circumstances, it can be tax-effective, allow you to invest in both residential and commercial properties, and utilise your superannuation before you retire. However, before you setup that brand new SMSF to buy property, you may want to consider the following.

Residential v Commercial

There are many superannuation funds investing in both commercial and residential real estate, often for very different reasons. That said, by far the most common reason to invest in property is to operate your business from it. The current legislative landscape allows SMSFs to buy commercial real estate and operate their business from that same property, and the fund can even buy the property from the members of the fund. What’s more, there are some quite generous capital gains tax concessions available in some cases when commercial property is acquired from the members. In stark comparison, SMSFs cannot lease residential property to the members or their relatives, and you cannot acquire residential real estate from the members or relatives.

Self-Managed Super Borrowing for a Property Purchase

Borrowing to buy property in superannuation isn’t something new, in fact the rules for this were introduced in September 2007. Borrowing within a SMSF can potentially be advantageous from a tax perspective, but there are tricks and traps to be aware of. Getting the documentation right from the outset ensures the transaction is compliant, and can potentially save some nasty surprises down the track. Something as simple as slightly incorrect wording on the offer and acceptance can cause major headaches. There are also limitations on improvements to the property, as the fund cannot borrow to upgrade it, but can borrow to repair it. Another condition is the property cannot be subdivided before the loan is repaid.

Self-Managed Super Borrowing – Tax Effectiveness

Is buying property through your SMSF really that tax-effective? It definitely can be, depending on your situation.

For an individual earning $77,000 per year in wages who also receives $10,000 rent, they pay $3,450 tax on the rent, leaving $6,550 in hand. That same $10,000 rent in an SMSF pays only $1,500 tax, leaving $8,500 in hand. Where the property has been held for longer than 12 months, the capital gains tax is reduced from 15% to 10%. Once trustees commence superannuation pensions for the members, capital gains tax can often be reduced to 0%. These are only 2 of the many benefits that can be unlocked by purchasing property with an SMSF.

Self-Managed Super Borrowing – Setup

From experience, the general consensus is that your fund will need $200,000 before most of the major financial institutions will lend to the fund. This is sometimes hard to achieve with only employer contributions, so there is scope for non-concessional contributions to be made to speed up this process. The key to establishing an SMSF or exploring SMSF borrowing options is to get advice from a reputable professional.

Give McKinley Plowman a call on 08 9325 2411 (Perth) 08 9301 2200 (Joondalup), or contact us via our website to see how our Finance team and SMSF advisers can help you get into the property market using your superannuation.

written by:

Jojo Rollerson

With her career in accounting spanning nearly two decades, Jojo brings to the MP+ Self-Managed Superannuation team extensive industry experience and a passion for industry-leading SMSF Services. Jojo and her team of accounting professionals manage clients’ self-managed superannuation fund affairs so they have the time to enjoy the things they would rather be doing! She enjoys giving clients peace of mind that their super is in the right hands, and has an excellent track record in turning complex superannuation situations into fantastic outcomes for her clients.

Outside of the office, Jojo loves travel, food, cooking, reading, movies, and a nice walk.