Buying property in SMSFs
January 29, 2014 / Written by Rich Harvey
By Rich Harvey
Self-managed super fund (SMSF) property investment has become increasingly popular with Australians in recent years. The growth of SMSFs has been spectacular. Recent statistics from the ATO show that there are now just under 500,000 SMSFs set up in Australia.
However, as with any type of investment, it pays to fully understand the advantages and potential risks.
Benefits of SMSF property investment
Australian property investment in an SMSF comes with many advantages, one of them being favourable tax rates.
For instance, the maximum tax rate an SMSF will pay on rental income is 15 per cent, and this can drop to 0 per cent if the SMSF is in the pension phase.
Additionally, while other investors will have to contend with capital gains taxes, if an SMSF holds a property for more than 12 months, the capital gains tax drops to 10 per cent, or 0 per cent during the pension phase.
Other benefits include being able to acquire property worth more than the available funds an SMSF has due to gearing, as well as the fact that an SMSF can receive all income and capital growth even if the property has not been paid off.
An SMSF can invest in all types of real property including residential property, commercial property, industrial property or rural property.
Rules to keep in mind
While SMSF property investment can be a great strategy to use, it does come with certain limitations.
For instance, the property must meet the sole purpose test, which shows that it solely provides retirement benefits for all fund members.
Additionally, the property cannot be purchased from a fund member or anyone related to a fund member.
The property must also not be lived in by a fund member or any related parties.
Finally, an SMSF cannot borrow money used to improve an existing property. While repairs can be completed using these funds, any changes that could be classified as renovations that would enhance the property's value are not allowed.
You can buy a property and construct a granny flat on the property, but the granny flat construction must be paid from funds within the SMSF (not borrowed funds).
If all this sounds too confusing, then we can recommend a smart tax accountant that can help you set up your own SMSF and ensure you are fully compliant with all the relevant laws. Call propertybuyer on 1300 655 615 or email us to ask for a recommendation.