Say What Wednesday

Buying Property inside an SMSF: Tips and traps, what works and what doesn’t

Welcome to Finance and Fury, ‘Say What Wednesdays’ where each week we answer your questions.

This week’s question is from Sandeep: “Hi, Can you please talk about how to purchase investment property using my superannuation?”

Thanks Sandeep, great question!

Buying property in superannuation

  1. First you need a Self-Managed Superfund (SMSF)
    • An SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO) that you manage yourself.
      • All other funds are managed by the Australian Prudential Regulation Authority (APRA) – the regulator of financial organisations (Banks and superannuation funds)
    • SMSFs can currently have up to four members. All members must be trustees (or directors, if there is a corporate trustee) and are responsible for decisions made about the fund and have to adhere to compliance with relevant laws/ Superannuation Industry Supervision (SIS) Act
    • When you run your own SMSF you must:
      • carry out the role of trustee or director, which imposes important legal obligations on you
      • set and follow an investment strategy that is appropriate for your risk tolerance and is likely to meet your retirement needs
    • You need to have enough time to research investments and manage the fund, keep comprehensive records and arrange an annual audit by an approved SMSF auditor
    • Organise your own insurance
    • Use the money only to provide retirement benefits.
  1. Who is it appropriate for?
    • Those wanting to combine individual superannuation balances
    • Those who are hands-on
    • Those looking to buy property
      • You can get Direct shares or Term Deposits in other super accounts which aren’t available within SMSF

Buying the property

  1. The property must meet the ‘sole purpose test’ – and only provide retirement benefits to members
  2. Must not be lived in by a member or related party (family)
  3. Must not be acquired from a member or related party
  4. Must not be rented by a fund member, or related party
    • BUT – the exception is business real property
    • Must meet the business real property definition – if you own and run a business you can operate out of a property your SMSF owns
    • Your SMSF generates an income as you pay rent to the SMSF at market rates – must adhere to definition of ‘Arms-length’ transactions

Property purchased with a loan – limited recourse borrowing arrangement (LRBA)

  1. Bare Trust – A separate legal structure which protects the members of the fund, set up inside the SMSF in order to borrow on behalf of the superfund.
    • The property it the sole collateral for the loan and any other assets owned by the superannuation fund are protected
    • Property has to be a ‘single acquirable asset’
      • Not able to change the character of the property (can’t subdivide or renovate it while there is a loan attached to it)
  2. When it works well
    • When you have a decent balance – ASIC guidelines say a minimum of $200,000, however the more the better – you’ll incur flat fees of $2,000 p.a. plus investment costs
    • The more you have the more you’re able to diversify into other investments. This comes back to having enough to spread around. There’s a great deal of additional risk with a lack of diversification. Don’t put all your eggs in one basket.
    • The property: Commercial real, especially if you have your own business – own it yourself and lease it to yourself. Super only pays 15% tax too!
  1. What won’t work – The risks of buying property
    • If the property is heavily negatively geared
      • Deduction are lost if no additional income is earned by SMSF to be offset by the deductions
      • Also, maximum rate of tax is 15% for accumulation
    • Not much in super – only asset is a property
      • Non-adherence with the fund investment strategy; liquidity requirement, meeting diversification requirements
      • Big risk to your retirement balances
    • Not making a lot of contributions
      • Sometimes the property income won’t cover costs; auditing costs, accounting costs, interest repayments etc
      • Need to have employer or personal contributions to meet cashflow requirements
    • Can’t make changes to the property until the loan is paid off
      • If you need to renovate for any reason, you will be stuck
    • It can be hard to wind up an SMSF
      • Loan documentation (if not set up properly) would require the complete sale of the property before SMSF can be closed
      • If you move overseas and become a non-resident you can’t have an SMSF
    • Additional rules, like the in-house asset test

If you are looking at doing it, seek advice! Don’t stuff up your retirement!

Thanks again for the question, and remember – these episodes are open to anyone who has a question! Go to Financeandfury.com.au and get in touch through the contact page!

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