Investing in SMSF-Compliant Properties -What You Need to Know?
If you’re like many other Australians, you have your eye on property as a way to build wealth and set yourself and your family up for a more financially secure future.
Whether you have been a part of the tremendous property boom in recent years – such as the 67.2 per cent total return that investors in Sydney and Melbourne saw from the five years leading up to 2016 – or you watched from the sidelines, it’s no secret that finding the right high-income property can yield some pretty impressive returns.
Using your superannuation savings to invest in property can be a great way to diversify your nest egg, setting you up for a reliable income stream during retirement. In fact, it has become a popular way to either start investing, or for experienced investors, to expand your portfolio – 27 per cent of SMSF’s invest directly in property.
The reality is, however, establishing a Self-Managed Super Fund (SMSF) – if you don’t have one already – and buying SMSF properties is an option that comes with a lot of risk and complexity.
Let’s take a look at what an SMSF-compliant property is, why you may want to add one to your property portfolio, and what risks you need to be aware of before even getting started.
What is an SMSF-Compliant Property?
To tap into your super savings to buy a property, you’ll need to purchase an SMSF-compliant property. With any SMSF asset, the intent behind the investment has to be to support the investment objectives of the SMSF. So, when it comes to taking out an SMSF loan and investing in property, you’ll need to make sure the property complies with the criteria set out by the Australian Taxation Office (ATO).
An SMSF-compliant property has to meet the ‘sole purpose test’. As long as a property meets the following standards, you can buy it through your SMSF:
- The property can only be purchased for the sole purpose of providing members (which may be you or you and up to five other trustees) retirement benefits.
- You can’t acquire it from a related party or another member of the SMSF.
- None of the fund members or members’ relatives can live in the property.
- You also cannot rent the property to a fund member or any related parties.
If it’s a commercial property, the rules are a little different. You can purchase your own business premises, which would make it possible to pay rent to your own SMSF at the market rate.
What are the benefits of buying an SMSF Property?
When you buy an SMSF-compliant property with your superannuation savings, you may be able to save a lot of money through tax incentives. With SMSF properties, rental income is taxed at 15%. Once you hold the property for over a year, the entity will receive further capital gains concessions.
Once you’re retired, your tax obligation goes down to 0% if you are getting pension from the fund! This translates into huge profit potential and a higher rental yield.
You can also invest the income you get from your property investment into another property, helping to build your wealth even more.
Using your SMSF can be an effective vehicle to enter the property market. A lot of people don’t have enough for a down payment in their personal savings account, but you may be able to use your SMSF to qualify for a loan.
Setting up an SMSF with family members (Mum and Dad or Husband & Wife) is another classic strategy of pooling individual balances together.
Risks involved in SMSF Properties
Investing in an SMSF-compliant property is different than investing without your SMSF.
First, SMSF loans are generally more expensive than standard investment loans. Banks charge more because of the complexity of the loan agreement.
Also, you’ll want to keep in mind all the costs associated with property investment. Costs such as property management fees and loan fees can eat away at your superannuation savings. This can become a problem if you don’t have enough cash flow in your fund, which is also where your loan repayments are coming from.
Although there are tax incentives to SMSF property investment, there are also tax disadvantages. For example, you cannot offset the SMSF losses against your personal income. You can only do this against your SMSF income.
Should you add an SMSF Property to your portfolio?
Ultimately, what’s right for you depends on your situation and your financial goals. Talk to the specialists either to your own financial planner or contact Business Growth HQ who can assist you to find out if buying an SMSF-compliant property can help you achieve your goals.
Business Growth HQ, is an innovative and proactive accounting and business advisory firm based in the Norwest Business Park in Sydney. Specialise in helping ambitious business owners grow their business, their profits and their wealth. They serve various industries and have strong expertise in administration and ongoing investment strategy of SMSF.