A Comprehensive Guide to Property Investment through Self-Managed Super Fund

By using an SMSF, you can gain greater control over your retirement savings and take advantage of opportunities that you might not have been able to access through traditional investing methods.

Tax advantages of SMSF property investment

Using the funds in your SMSF to purchase property means you benefit from the same tax-advantaged opportunities as you would with other types of investments. The main advantage is that rental income and capital gains generated by a property owned in an SMSF are taxed at 15%. This means more money remains in your super fund instead of ending up paying taxes. For properties held for more than 12 months, the fund is entitled to a one-third discount on any capital gain realises upon sale. This effectively reduces the capital gains tax liability to just 10%, resulting in significant savings.

You’ll also be pleased to note that when your fund enters the pension phase, your SMSF is exempt from capital gains tax. This allows your savings to grow unhindered, optimising your financial security in your golden years.

If you buy the property with a loan, you’ll be happy to know that the interest payments can be deducted from the fund’s taxes. Once trustees start receiving a pension at retirement, any rental income or capital gains arising in the fund will be completely tax-free.

Limited recourse borrowing arrangements.

Since 2010, it has become possible for SMSFs to borrow money to purchase property. This is known as a limited recourse borrowing arrangement (LRBA). This arrangement allows SMSFs to purchase property with just a fraction of the funds they have available, while providing greater flexibility in terms of how much money is put into the investment.

For instance, consider an SMSF that has $200,000 in cash. With a limited recourse borrowing arrangement (LRBA), the fund can use a portion of these funds, say $50,000, as a deposit to secure a property worth $200,000. The rest of the property cost can be financed through a loan. The rental income from the property will help to cover the loan repayments. Over time, as the property appreciates, the SMSF can sell the property and pay off the remaining loan amount. The net capital gain, taxed at a concessional rate, remains with the super fund, thereby increasing the retirement savings.

While buying property through an SMSF can offer potential tax benefits and diversification of your investment portfolio, it is not a decision to be taken lightly. Firstly, the cost and complexity of setting up and running an SMSF can be significant. Additionally, SMSFs are subject to stringent regulatory requirements and failure to comply can result in heavy penalties.

Things you need to be aware of before buying property through SMSF

One of the key drawbacks of buying property through an SMSF is the complexity involved in the process. The legal and financial responsibilities of managing an SMSF can be overwhelming for many, not to mention the risks of non-compliance with superannuation laws. There are strict rules regarding the types of investments an SMSF can make and the conditions under which assets can be bought and sold.

Another major consideration is that residential property purchased through an SMSF cannot be occupied by the fund’s members or any related parties. This means you can’t live in the property you own through your SMSF. It also implies that the property cannot be rented to any family members. This rule is in place to ensure the assets of the SMSF are used solely to provide retirement benefits to its members.

What is Super?

Super, short for superannuation, is a long-term savings plan in Australia designed to provide financial security for retirement. It involves accumulating funds throughout your working life, which are then used to support you during retirement.

What are the benefits of using a managed super fund to invest in property?

The primary benefit of using a managed super fund (SMSF) to invest in property is the potential for tax advantages. If you use your SMSF to purchase an investment property, you are able to take advantage of concessional tax rates and other incentives that can reduce your overall tax burden. Additionally, by investing through an SMSF, you gain more control over how your investments are managed, giving you greater peace of mind that your money is better protected.

How can you Purchase Property with a Self-managed super fund?

Once the SMSF has been established, you can borrow funds from a bank or other financial institution to purchase an investment property or properties.

Can you use your super to buy a house?

Yes, it is possible to use your superannuation funds to purchase a house. However, there are strict rules and regulations that must be followed in order for this to happen. For example, you can only buy residential property with your SMSF if the fund trustee (you) has an intention of renting out the property.