For many Australians, a large part of their net wealth is in the Australian property market. No other asset class in Australia has had such consistent growth over the past 30 years. Given this, it's no wonder people often express interest in using their SMSFs to purchase property.

As Chartered Accountants, we aren't able to give you financial advice on investments, however we can help you understand the rules governing investing in property using SMSFs, the potential tax benefits and implications, as well as some of the ways that buying property in SMSFs have been made easier by recent changes in the SMSF property loan space.

If you're interested in exploring the SMSF investment property space further, schedule a consultation with us here. If you're looking for financial advice, we can put you in touch with several of Sydney's foremost financial planning firms.

Commercial property vs residential property

When buying residential property through a Self Managed Super Fund (SMSF), it's important to ensure the investment aligns with strict rules set to protect your retirement benefits. The property must pass the 'sole purpose test', which means it sole aim should be to boost your retirement savings. It's critical the property isn't rented out to a related party, nor can it be occupied or rented out by any fund members or their relatives. This ensures the investment remains impartial and focused on long-term financial security.

For those seeking to use their SMSF to purchase commercial property, the rules around use are more flexible. For example, you can purchase your business premises through your SMSF, allowing your business to rent the property back at market rates. While this may seem appealing, remember that diving into property investment with your SMSF involves fees and charges, such as legal fees, stamp duty, and property management costs.

Benefits of buying an investment property using your SMSF

Here are the reasons why you might consider an SMSF property investment:

Tax efficiency

Building up a portfolio of property owned by your SMSF can be more tax-efficient compared to personal investments. Within an SMSF, earnings are taxed at a lower rate of 0%-15%, offering significant savings over personal tax rates. That being said, there may be some disadvantages as well depending on what your overall strategy is. For instance, if you purchase property in an SMSF you aren't able to negatively gear the losses in the SMSF against your own personal tax liability; any negative gearing must be against the SMSF's tax liabilities.

Holding property in an SMSF can potentially lead to reduced Capital Gains Tax (CGT) liabilities. Properties held for over 12 months in an SMSF are eligible for a one-third discount on capital gains, capping the maximum tax rate on the capital gain to 10%.

Business advantages

For business owners, an SMSF offers the opportunity to purchase commercial premises and lease them back to your business. This setup allows you to pay rent to your own SMSF, effectively keeping the money you would have spent paying someone else rent within your retirement fund. It's important to ensure the rent paid reflects the current market rate to comply with SMSF regulations.

Enhanced buying capacity

With an SMSF, you can pool resources with up to five other members, boosting your collective buying power. This increased capital can open up more investment opportunities, potentially leading to greater returns for your fund as a result of capital growth in the property value.

Control over investment property

Unlike other superannuation options, an SMSF gives you direct control over your investment choices, including the ability to invest directly in property. This level of control allows for personalised investment strategies and portfolio diversification, tailored to your specific financial goals.

However, it's important to note property investment through an SMSF also comes with risks and responsibilities. For instance, the property must meet the 'sole purpose test' of providing retirement benefits to fund members. Also, the property cannot be used for personal purposes or provide any immediate benefit to fund members or their relatives. Again, we recommend you seek professional financial advice if you need guidance on what the best course of action is for your own unique situation.

Steps when investing in property through SMSFs

When investing in property through a Self Managed Super Fund (SMSF), it's important to follow these steps:

Choose the right property

Select a property that complements the SMSF's investment strategy, ensuring it meets the sole-purpose test of solely providing retirement benefits to fund members. This selection process should focus on properties that are likely to contribute to the long-term growth and financial security of the fund.

Do comprehensive due diligence

Perform an in-depth analysis of the chosen property. This involves evaluating the property's market value, potential rental yield, and compliance with SMSF regulations, ensuring it qualifies as business real property, if applicable. It's also essential to check for any legal encumbrances or issues that might affect the investment.

Secure financing

If additional funds are needed, consider a Limited Recourse Borrowing Arrangement (LRBA), which is a loan structure allowing SMSFs to borrow for property investment under strict conditions. The key feature of an LRBA is that the lender's recourse in case of default is limited to the property itself, protecting the other assets within the SMSF from risk.

Considerations before investing in property with an SMSF

It's a very good idea to speak to your accountant, mortgage broker, and a financial adviser if you have one, before proceeding to set up an SMSF if your goal is to use it to purchase property. A mortgage broker will be able to tell you whether your current industry super fund has the requisite funds needed for banks or other lenders to consider it eligible for the loan you require in order to purchase the property.

What are the costs of SMSF property investment

Investing in property through a Self Managed Super Fund (SMSF) entails a range of costs that are crucial for fund members to consider, as they can significantly affect the overall retirement savings. Engaging in SMSF property investment, whether it's residential or commercial property, requires a comprehensive understanding of the associated expenses. These include:

• Initial and legal fees: Costs incurred at the start, such as those for purchasing the property and legal consultations to ensure compliance with SMSF regulations.
• Advisory fees: Expenses related to obtaining financial advice on your investment strategy, crucial for navigating the complexities of property investment within an SMSF.
• Stamp duty and ongoing management costs: Government-imposed stamp duty and regular expenses like maintenance, council rates, and insurance are pivotal in maintaining the property's value.
• Financing charges: If purchasing property through a Limited Recourse Borrowing Arrangement (LRBA), be mindful of bank fees and interest payments, which can impact fund assets.

Next Steps

Before deciding to buy property with your super fund, consider if it matches your fund's investment plan and if you're comfortable with the level of risk. Adding a loan to your super fund can make things more complicated, so getting advice from a qualified financial adviser is wise. They can help you understand the costs and risks, which can be higher than usual loans. Your super fund needs enough money to cover all the expenses, including loan payments, property upkeep, and insurance, while still being able to pay out retirement benefits.

You can't use any tax losses from the property to lower your taxes outside the super fund, and you can't make big changes to the property until the loan is fully paid off.

If you currently have an SMSF but are not happy with the level of expertise or support provided by your current SMSF accountant, or are thinking about setting up an SMSF, you need an SMSF accounting expert. Reach out to us today to set up an appointment. You can learn more about our SMSF services here.

If you are looking for financial advisory services, we have strategic partnerships with several of Sydney's best Financial Advisory firms, and can put you in touch with someone.