Ask an Adviser - What Are The Tax Benefits Of Buying A Property Using A Self Managed Super Fund? (3)

Hi Greg,

In short, you can absolutely invest in property in your self-managed super fund and use your available balance. You can only buy property through your SMSF if you comply with the rules below.
The property must:

1. meet the 'sole purpose test' of solely providing retirement benefits to fund members
2. not be acquired from a related party of a member
3. not be lived in by a fund member or any fund members' related parties
4. not be rented by a fund member or any fund members' related parties

If your SMSF purchases a commercial premises, it can be leased to a fund member for their business. However, it must be leased at the market rate and follow specific rules. 

SMSF property sales may have many fees and charges. These fees can add up and will reduce your super balance.
Costs include:

1. upfront fees
2. legal fees
3. advice fees
4. stamp duty
5. ongoing property management fees
6. bank fees

You can also borrow or gear your super into property, but it involves very strict borrowing conditions. It's called a 'limited recourse borrowing arrangement'. You can only purchase a single asset with a limited recourse borrowing arrangement. For example, a residential or commercial property.

You should assess whether the investment is consistent with the investment strategy and risk profile of your fund.

Geared SMSF property risks include:

- Higher costs – SMSF property loans tend to be more costly than other property loans.

- Cash flow – Loan repayments must come from your SMSF. Your fund must always have sufficient liquidity or cash flow to meet the loan repayments.

- Hard to cancel – If your SMSF property loan documents and contract aren't set up correctly, you can't unwind the arrangement. You may have to sell the property, potentially causing substantial losses to the SMSF.

- Possible tax losses – You can't offset tax losses from the property against your taxable income outside the fund.

- No alterations to the property – You can't make alterations that change the character of the property until you pay off the SMSF property loan.

Whilst your borrowing costs are deductible against the rental income when you invest either inside or outside super, the capital gains tax upon the sale of the property within super can be significantly less when compared to your marginal tax rate, depending on your assessable income. If the asset is held for more than 12 months, your effective tax rate is 10% on the gains.

However, you should also consider the principles of diversification when looking at your SMSF and see if investing in a property allows your fund the ability to be sufficiently diversified and meet its retirement objective. Before considering this investment, it would be prudent for you to seek expert advice in this matter.

Response provided by Aziz Meherali from Elixir Private Wealth.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

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