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

Top answer provided by:

Ralph Morgan

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Dear Greg,

Yes, it is possible to use your superannuation to invest in property within an SMSF, however there are rules, costs and risks that must be carefully considered. Consultation with a financial advisor with expertise in this area is highly recommended. There is a fundamental question of whether a SMSF is suitable with an existing superannuation balance of around $200K, due to the compliance and running costs of a SMSF compared to a low-cost superannuation fund. This would depend on your individual circumstances - for example, it may suit a person who expects to make substantial contributions into superannuation in future years but might not be suitable for someone that will not be in a position to make substantial super contributions.

You also need to be aware of the time and effort required to be an individual SMSF trustee (possible if the SMSF has 2-4 members) or the cost to have a corporate SMSF trustee (available for a SMSF with 1-4 members). If you were considering rolling over your existing superannuation into an SMSF, you also need to carefully consider any impacts on insurance that may be provided within your current superannuation. And you would also need to assess whether a property investment is consistent with the investment strategy and risk profile of the SMSF - for example, you may end up excessive risk due to lack of asset diversification.

If a property is bought through an SMSF it must comply with the following rules:

- the property must pass the 'sole purpose test' of only providing retirement benefits to fund members e.g. you could not buy a holiday home via your SMSF and stay there a few weeks each year.

- the property must not be acquired from a related party of a member e.g. you couldn't buy your parents’ house via your SMSF

- the property must not be lived in by a fund member or any fund members' related parties e.g. you couldn't buy a house within your SMSF and live in it (or allow your parents to live in it)

- the property must not be rented by a fund member or any fund members' related parties e.g. you couldn't buy a house within your SMSF and rent it out to your cousin

- if the SMSF purchases a commercial premises it can be leased to a fund member for their business use, but it must be leased at the market rate (and specific rules apply).

Borrowing or gearing your super into property is known as a 'limited recourse borrowing arrangement' or LRBA and is subject to very strict conditions. You can only buy a single asset with an LRBA such as a residential or commercial property, and SMSF property loans tend to cost more than other property loans. Loan repayments must come from the SMSF, so your SMSF would need to have sufficient liquidity or cash flow to meet the loan repayments.

Superannuation investment earnings during accumulation phase are taxed at 15% (and capital gains held for at least 12 months receive a discount of 33%, meaning capital gains within super are effectively taxed at 10%). However, you cannot offset tax losses from property held within superannuation against your personal taxable income outside of the SMSF. Property investing outside of superannuation can also be tax effective where negative gearing is used.

I hope this general information may be of assistance.

Warm Regards,

Ralph

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Article by:

Ralph Morgan

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