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!

(Intro Series) Trusting yourself and learning the basics

Intro - Episode 4 Trusting yourself and learning the basics To start off, do you think that having a map to financial independence would be the ideal solution? Compared to a puzzle it actually would be far better than trying to piece together something, if you could...

Furious Fridays: Why must Governments and Central Banks force inflation on a Nation?

Welcome to Finance and Fury, the Furious Friday edition! I’ve been thinking a lot about what we are taught in economics, the basic ‘101’. Specifically, if you print a lot of money you get hyper-inflation. There are plenty of stories to back this up Germany Weimar...

Regulations and the war on drugs

Welcome to Finance and Fury. Do regulations solve any problems? To explore this concept, we will be looking specifically at drug regulations – because if the answer was yes, regulations would solve the problems of society and have the intended outcome of creating a...

Cover your butt! A closer look at diversification

Episode 6 Not all returns are created equal; diversification (and over diversification), correlation and covering your butt Welcome to Finance & Fury! I’m sure that everyone’s heard the saying, “playing it safe” before. And in any game, it’s generally a good idea....

How to build a framework for making important financial decisions.

Welcome to Finance and Fury. Today’s episode – how to build a framework for decision making – for investments or wealth building strategies Not one set way to make a decision – everyone is different – everyone has different situations – people make decisions in...

Say What Wednesday: The perfect investment mix

Say What Wednesdays The perfect investment mix Today’s Say What Wednesday question is from Linus. Linus asks, ‘I was just wondering what you think the ideal weighting of Australian (ASX200) ETFs, similar international ETFs and Bonds is in an investment portfolio? Love...

Furious Friday: How do we avoid the decline into a recession?

Welcome to Finance and Fury the Furious Friday edition Today we are continuing the discussion around supply-side economics We will talk about the best ways to avoid declining into a recession as an economy and some solutions for economic growth. Last Friday we talked...

The Federal Budget: How will you be affected and will the proposals benefit you?

Welcome to Finance and Fury. This episode we’ll be talking about latest federal budget that was announced this week - and the implications this will have for individual There were many announcements in the budget – few good things like the reduced tax on innovated...

Can shares be leveraged as part of a property purchase?

Welcome to Finance and Fury, The Say What Wednesday Edition I would like to start by saying a big thank you for the knowledge you have passed onto myself and the community. My question lies around equity, if you have a considerable amount of money in shares, say 200k,...

Furious Fridays: Furious Fridays: The Myth of trickle-down economics

Hey all, and Welcome to Finance and Fury, the Furious Friday edition. Have you ever heard of trickle-down economics? As you know, Friday episodes are here to clear up any misconceptions about economics and politics, and this is the biggest one when it comes to...

Pin It on Pinterest

Share This