The Australian Government’s decision to allow SMSFs to borrow money to purchase property has been described as the best tax incentive for property investing since negative gearing. Tax savings will always depend on individual circumstances however one example of the advantage of buying property in your SMSF is that Capital Gains Tax (CGT) does not apply if your SMSF purchases an investment property and then sells it when fund members are in ‘pension phase’, potentially saving hundreds of thousands of dollars in tax.* Even if the property is sold earlier, CGT is capped at 10% if a fund holds the property for more than 12 months.
Also, tax on SMSF earnings is currently 15% so the maximum tax payable on the property’s income (for example rent) is 15%. Any expenses such as interest, council rates, insurance and maintenance can be claimed as tax deductions by the SMSF in the same way such expenses are claimed by an individual investor.
What can’t I buy?
Not all property investment options are available to SMSFs:
Property for redevelopment
SMSF investment is intended solely for the benefit of the members of the fund. Property purchased for the purpose of redevelopment may be interpreted as the fund carrying on a property development business rather than solely providing for members’ retirement.
Property owned by friends or relatives
An SMSF is not allowed to acquire assets from a member or an “associate” of a member. The word “associate” has a wide meaning and includes friends, relatives and corporate entities with which you have a connection. One exception is the transfer of Commercial Property form a member to the SMSF. Learn more about this exception here.
A holiday house
Unless the holiday house is purely an investment, (ie you don’t use it for private purposes, even once year) it will breach SMSF rules which provide that the investment must only have one purpose – usually to provide an investment return to the members.
Any property investment that does not fit within the SMSF Investment Strategy
When you set up an SMSF, one of the first things you will do is discuss and create the SMSFs investment strategy with a Financial Adviser. The strategy will be clearly outlined in the SMSF trust deed and the SMSF can only use borrowed money to purchase a property if the property fits within the strategy.
Is it for me?
Australians love property investing and in general it is a fairly secure investment. Before making a final decision though, it is important to ensure it is the right choice.
Here’s some general pointers:
- Typically your fund will need to hold at least 40% of the property value as the deposit is generally 30% and there are additional costs such as Stamp Duty.
- Members must make regular contributions to the SMSF as these will usually be relied on by the bank when considering your loan application.
- Direct property investment must be permitted by the SMSF investment strategy.
As everyone’s circumstances are different, you should talk to us about your individual situation as there is no such thing as a ‘one size fits all’.
We will guide you through the property investment process from providing initial advice about whether or not you are in a position to purchase property through your SMSF road. If it is the right choice, we (together with our industry alliance partners) will take you through the whole process.
We set up the structure
One of the first things the bank will look at when you apply for a loan to buy property through your SMSF is the SMSF. Some estimates put the percentage on incorrectly established structures at between 55% and 60%. This can lead to delayed settlements and penalty interest being applied. We look after this crucial step and ensure the SMSF is set up correctly and complies with relevant legislation.
Finding a property
The chosen property must comply with the ‘sole purpose’ test – that is, all SMSF investments, including property, must be undertaken for the sole purpose of providing retirement benefits to members.
Our Industry Alliance partners know which types of property are suitable for SMSF Investment and which aren’t so we can refer you to an expert in this area.
Commercial property can be purchased from a member or related entity and a business run by one or more of the SMSF members can occupy the property as a tenant, making the SMSF structure a smart choice for business owners.
Accounting and administration
It is crucial that your SMSF complies with its ongoing tax and administration obligations. We will advise you as to what is required in this area and happily arrange one of our Industry Alliance Partners to assist, ensuring you never fall foul of ASIC or the ATO.
*Please note we do not provide financial or Tax advice, rather we work with trusted industry professionals in this area.