Should You Invest in Property Through Your SMSF?
Self Managed Super Funds (SMSFs) are growing in popularity due to increasing competition in the industry and a growing distrust of Australian investment firms. Each year, more than 30,000 funds are established, and there are currently over 600,000 registered SMSFs in Australia. However, there are strict rules and penalties that can affect your investments, so it’s important to obtain legal and financial advice from the start.
SMSF loans allow borrowers to purchase property as an investment through their super fund. Whilst the borrower cannot live in the property, the growth in value plus any rental income accumulated by the property can be accessed at retirement.
Sole purpose rule
An SMSF must solely exist for the purpose of funding the member’s retirement. The sole purpose rule means that the trustee cannot personally live in a residential property until retirement, nor rent it to anyone associated with them. The property must also be acquired from an arms-length vendor at normal market price.
However, a commercial property bought by the SMSF can be leased to a related commercial tenant. This can be a good option for business owners, however the property still must be rented at market rates.
Penalties for non-compliance are severe, with fines of up to $340,000 and five years jail. For this reason, we strongly recommend you seek legal expertise and the advice of an SMSF loan expert before committing to any purchase.
What can be purchased?
As long as you can prove that the sole purpose of the investment is funding retirement, it is possible to purchase almost any type of asset through an SMSF. A property can be residential or commercial, but must be already established or purchased off-the-plan.
What can’t be purchased?
To pass the sole purpose test, you must be able to show that you are not benefiting from the asset until retirement. As such, SMSFs cannot purchase:
- Property for redevelopment or resale
- New or used property from any friend, family member or associate
- A holiday home that you intend to use or rent to a friend or associate.
How much tax can be saved?
Tax laws are always changing, so be sure to check with a professional before making these calculations. Capital gains tax is not payable if the SMSF purchases an investment property and then sells it when the fund members are in retirement. If the fund sells the property before the retirement stage, capital gains tax is capped at 10% providing the property has been held for more than one year.
Tax on SMSF earnings is capped at 15%, which means that the maximum tax payable on the property’s earnings is 15%. Any expenses such as interest, rates, insurance and maintenance can be claimed as tax deductions by the SMSF.
Although the regulations and up-front investment may discourage people from buying a property through an SMSF, it can be well worth the investment when done properly. At Lendfin, we are able to access SMSF loans through multiple lenders to get the best deal for you. Contact our SMSF specialist today to discuss whether an SMSF loan could benefit you in retirement.