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A growing number of people are realising the benefits of using a superannuation fund to invest in property. Recent statistics show that self-managed superannuation funds have invested in about $67 billion worth of property in Australia.
However, before investors dive in and purchase a property using an SMSF there are a few key issues to consider.
1. Does property fit in my investment strategy?
Before investing in any type of asset investors need to be sure that it is the right asset for their situation.
All SMSFs must have an investment strategy in place. The investment strategy outlines the objectives of the superannuation fund and specifies what assets the fund can and cannot invest in. Before considering a property investment, investors would need to make sure that the SMSF’s investment strategy allows for such an investment, and that it is the appropriate investment for the situation.
Given the size of a typical property investment, property may constitute a large portion of one’s SMSF. If this is the case, the investor would need to review their investment strategy to ensure the purchase is viable while taking care to ensure that there is capacity for other assets to be available for payment of fees, taxes and/or pension payments.
Bear in mind, you cannot simply sell off the second bedroom to fund these costs.
2. Can I use property as a personal use asset?
Superannuation legislation clearly states that members of a SMSF (and their families) cannot make use of an asset owned by the SMSF (there are some exceptions to this rule, such as in the case of business real property). This means that if the investor plans to purchase a property within their SMSF, they need to be sure that the property is used purely for investment purposes. For example, the investor cannot purchase a property within the SMSF and then live in the property - or rent it out to a family member.
Harsh penalties apply if the investor’s fund breaches this rule. For example, if the fund is found to be non-compliant, the investor could be charged 46.5% tax on the fund balance, meaning nearly half of the fund would be lost to tax.
3. What is the best property to purchase: residential or commercial?
Investors are able to purchase many types of property within a SMSF, but it generally comes down to whether or not they are looking to purchase a residential or commercial property. In broad terms, a residential property will provide a lower yield (i.e. rent), but provide good capital growth, whereas a commercial property will provide a higher yield at the expense of capital growth.
Other things to consider are that the outgoings are generally paid by the landlord (i.e. the SMSF investment) for a residential property, whereas the tenant usually pays these costs with a commercial property lease.
In addition, commercial property generally costs more than residential property, so it may not be a viable option depending on the size of the investor’s SMSF.
4. Can I borrow funds from the SMSF to purchase property?
Superannuation legislation was amended a few years ago to allow superannuation funds to borrow for investment purposes. This change put property back on the agenda for a number of SMSF trustees. Previously, property investment within a SMSF was out of reach for many investors due to the large purchasing costs.
There are strict rules surrounding the use of borrowed funds within a SMSF – but if used correctly, they allow SMSF trustees to take advantage of gearing an asset with significant tax concessions.
5. What are the taxation implications on property purchase in an SMSF?
Tax should never be a primary reason for investment, but it is important to be aware of any potential tax implications when making an investment via an SMSF.
Superannuation funds pay tax on earnings at a flat rate of 15%, and therefore there may be a large tax benefit if the investor holds a property within his or her SMSF – as opposed to his or her personal name – as any rental income or capital gains would be taxed at a reduced rate.
Depending on the investor’s situation, he or she may even be able to reduce their SMSF tax rate to zero. This means the investor could receive rental income tax-free, or realise large capital gains without paying a portion of the profit to the ATO.
While there are a number of things to consider before using an SMSF to purchase a property, it is important that investors seek professional advice to ensure that the right decision is tailored to their individual situation.
Simon Curtain is a private client advisor at <a target="_blank" title="Hewison Private Wealth" href="https://www.hewison.com.au/">Hewison Private Wealth</a>
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Simon Curtain

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