Property investing through your self managed superannuation fund (SMSF) can be a great way to create wealth for your retirement. Investing in property can be an effective way to diversify your superannuation investments, and any income from the investment property, including capital gains, may be taxed at concessional rates. This could mean a financial saving  in the long run.

We receive many enquiries from clients wanting to setup an SMSF primarily to invest in residential property, so I have prepared some information to consider before you do.

SMSF Property Rules & Regulations

You can only buy a property through your SMSF if you comply with the rules established by the ATO. It is important for trustees to understand these rules, as the ATO are  vigilant. A good, specialist SMSF Accountant like we have in our team at Maddern Accountants can educate you on these rules and keep you compliant.

In summary, the property itself:

• Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
• Must not be acquired from a related party of a member
• Must not be lived in by a fund member or any fund members’ related parties
• Must not be rented by a fund member or any fund members’ related parties

In addition to this, your SMSF can also potentially purchase your business premises, allowing you to pay rent directly back to your SMSF at a commercial market rate.

I must stress that it is very important that the correct tax structure be put in place PRIOR to the signing of any property purchase contracts. We have seen several clients of other firms come unstuck and be unable to settle the property because the correct structures were not in place first, and this is information which many Real Estate agents do not fully understand.

What will it cost for an SMSF Property?

Aside from the cost of the property, and like any property transaction, SMSF property transactions do have fees and charges. Typically you will come across the following costs:

• Upfront fees to establish the correct tax structure
• Legal fees
• Conveyancing fees
• Advice fees
• Stamp duty
• Ongoing property management fees
• Bank fees

SMSF borrowing

Borrowing or gearing your super into property is not as straightforward as a normal home loan, and must be done under very strict borrowing conditions called a ‘limited recourse borrowing arrangement’.

A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of your fund.

Factors to consider when gearing inside your SMSF:

• Costs – SMSF property loans can be more costly than other property loans which must be factored into your investment decision. A good mortgage broker who specialises in Self Manage Super Funds will be able to assist here.
• Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
• Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly, unwinding may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
• Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
• Cannot borrow to improve the property – Borrowed funds can be used to maintain a property but cannot be used to improve a property.

All in all, property investment inside an SMSF can be highly advantageous for investors. They advantages of purchasing a property vai an SMSF include:

• be an excellent way to diversify your portfolio,
• pool an existing and otherwise uncommitted group of funds (i.e. a husband and wife or business partners, parents & children) to invest,
• buy your business premises (where appropriate and allowed) and
• utilise concessional tax treatments to improve your retirement benefits.

However, buying a Property and or setting up a Self Managed Super fund is not appropriate for everyone. The best step to determine whether this is right for you, is to meet with an Accountantand/or Financial Adviser who specialises in Self Managed Superannuation Funds and can advise you on the appropriateness.

Transfer your SMSF at no cost

If you have an existing Self Managed Fund, we currently have an offer to transfer your SMSF to our management, without any cost. Please see our offer for further details.

All information provided in this newsletter is of a general nature only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.