Did you know it’s possible to buy an investment property through a self-managed super fund (SMSF)? An SMSF is a private superannuation fund that can have between one and four members. All members are responsible for decisions made about the fund and compliance with the relevant legislation.
It’s common for SMSF trustees to consider purchasing investment property through their fund. However, the process is often complex, particularly when it comes to borrowing money. Before buying property through your SMSF, you must be aware of the specific rules and regulations that apply.
In this article we will look at:
- Buying investment property with an SMSF
- Borrowing money when buying property with an SMSF
- Recent laws affecting SMSFs
- Can you claim depreciation for an SMSF investment property?
Buying investment property with an SMSF
In order to buy property through an SMSF, you must abide by the following requirements.
The property must:
- Meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- Not be acquired from a related party of a fund member
- Not be lived in by a fund member or any fund members’ family
- Not be rented by a fund member or any fund members’ family.
While a property cannot be rented or lived in by a fund member or their relatives, most SMSFs are entitled to purchase their business premise, allowing trustees to pay rent directly to their SMSF at the market rate. This is particularly appealing to small business owners.
SMSF property sales often attract higher fees and charges, which can reduce your super balance. It’s important to be aware of any fees including legal costs, stamp duty, property management expenses and bank fees before signing up.
Borrowing money when buying property with an SMSF
It’s possible to borrow money when purchasing property through an SMSF, however it must be done under strict conditions referred to as a limited recourse borrowing arrangement (LRBA).
A LRBA involves an SMSF member taking out a loan to purchase a single asset, in this case a property, which is held in a separate trust. Any investment returns earned from the property go to the fund. If the SMSF defaults on the loan, no other assets are affected.
The SMSF fund generally needs to have a minimum balance of $120,000 to be able to purchase a property and an annual contribution of at least $15,000. In addition, most banks require an SMSF to have at least 30 per cent of the value of the property as a deposit and often charge a higher rate of interest.
As borrowing to invest can sometimes be considered high risk, it’s best to discuss your borrowing options and LRBA with a trusted financial adviser.
Recent laws affecting SMSFs
The ATO reduced concessional contribution caps in 2018, a decision that attracted controversy due to the already complex nature of SMSF contribution legislation.
Concessional contributions are the funds that go into your super account from your before-tax income. The concessional contribution limit is now set at $25,000, while the after-tax or non-concessional limit is $100,000.
The ‘bring-forward rule’ allows a trustee to contribute up to three years’ worth of non-concessional contributions in one year. This means the trustee can contribute $300,000 in one year as long as the total super balance (TSB) isn’t above $1.5 million and you complete the three-year period before turning 65.
If a trustee makes accidental excessive contributions, they cannot simply withdraw the excess amount. Doing this can result in being penalised for withdrawing funds from an SMSF when ineligible to do so. This is because a trustee has to meet a condition of release before they are able to withdraw from their SMSF.
To withdraw an accidental contribution, a trustee must apply for a condition of release with the ATO.
The way the ATO calculates a trustee’s TSB has also changed. In certain circumstances, an individual’s LBRA amount will be factored into their TSB if the loan contract was entered into on or after the 1st of July 2018. This will apply if:
- The LBRA is with an associate (relative, other member of SMSF, partner or company) of the fund. All members of the fund whose interest is supported by the asset purchased using the loan must include the LBRA in their TSB calculations.
- A member of the fund met a condition of release with a nil cashing restriction.
If your TSB is greater than $1.6 million, you can no longer make non-concessional contributions.
The ATO also made changes to the way an SMSF can buy assets such as property. A property purchased through an SMSF must be done on an ‘arm’s-length basis’, meaning that a transaction made by the fund must reflect the true market of the asset.
Any income made from that asset must also reflect the true market rate of return. For example, an SMSF trustee cannot purchase a house to be rented by their son at a lower rental rate. Any non-arm’s length income (NALI) is taxed at a higher marginal rate.
In 2018, the definition of NALI was expanded. From the 2018-2019 financial year and onwards, the income of a super fund will be taxed at the top marginal rate if trustees are not dealing with each other at arm’s length and the fund:
- Incurs a loss that is less than expected had the parties dealt with each other at arm’s length
- Incurs a loss to acquire a fixed entitlement to the income of a trust and that loss is less than expected had the parties dealt with each other at arm’s length.
Can you claim depreciation for an SMSF investment property?
There are tax implications when the trustees of an SMSF choose to invest in real estate. As with any other property investment, SMSF trustees who invest in real estate are entitled to claim capital works deductions for the wear and tear of a building’s structure as well as depreciation for any eligible plant and equipment items.
It’s important that SMSF trustees take advantage of the additional funds available via a depreciation claim. BMT Tax Depreciation can prepare depreciation schedules for trustees with an investment property to help maximise their claims.
You might also enjoy reading:
- How much do you need to retire comfortably?
- Investing in property for your retirement
- Key things to know and consider before setting up an SMSF
- Costs associated with SMSFs. Subject to a case specific analysis, an SMSF may be more expensive than retail funds if the fund holds minimal assets. ...
- Legal and compliance obligations. ...
- Expertise and performance.
it must have fewer than 5 members. all members must act as a trustee of the fund and all trustees must be a member of the fund. Alternatively, if the fund has a corporate trustee – all members must be a director of the corporate trustee and all directors must be a member of the fund.
- Key legislation. ...
- Sole purpose test. ...
- Prohibited from lending money. ...
- Prohibited from acquiring assets from related party. ...
- Avoid in-house assets. ...
- Prohibit from borrowing (specific exception applies) ...
- Do not pay member benefits early.
The income of your SMSF is generally taxed at a concessional rate of 15%. To be entitled to this rate, your fund has to be a 'complying fund' that follows the laws and rules for SMSFs. For a non-complying fund the rate is the highest marginal tax rate.
An SMSF might be the right choice for you, if:
There are many costs involved with setting up and managing an SMSF, and you generally need a balance over $200,000 for SMSFs to be cost-effective compared to a standard super fund. This isn't a set rule, but it's a good guideline to consider.
Can I sell property from my SMSF to myself? Yes, if the transaction is at market value i.e. on an arm's-length basis and you may need a documented independent valuation to support the purchase price.
When a superannuation fund is wound up, generally the investments are cashed out and the funds are given to the retiree. The exception is in-specie transfers, when instead of being sold, the title of the SMSF property (or other assets) is transferred to the SMSF recipient on retirement.
– stated that the average cost of running an SMSF was $13,900 a year.
According to the ATO's guidelines on valuations, an external valuation of real property is not required each financial year. Most SMSF auditors will request an updated external valuation be performed every three (3) years unless the trustees expect the previous valuation to be materially inaccurate.
Set up your SMSF
All SMSFs are regulated by the ATO. Because everyone's situation is different, it's always best to get financial advice before you make a decision or any investments.
Members and trustees of SMSFs
If you illegally access your super early, the withdrawn amount is required to be included in your assessable income, even if you return the super to the fund later. This means you will have to pay additional income tax, tax shortfall penalties and interest.
Your SMSF's assessable income includes any net capital gains, unless the asset is a segregated current pension asset. Complying SMSFs are entitled to a capital gains tax (CGT) discount of one-third if the relevant asset had been owned for at least 12 months. A net capital gain is: the total capital gain for the year.
A super income stream is when you withdraw your money as small regular payments over a long period of time. If you're aged 60 or over, this income is usually tax-free.
You can lodge the SMSF annual return either: electronically, or. on the paper form Self-managed super fund annual return 2018 (NAT 71226).
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.
For self-managed super fund loans, the regulator is expecting the lenders to hold more money on the balance sheet than they do for a standard residential loan, and what that does, quite simply, is that's increasing the cost of that dollar that the bank is lending to your self-managed super fund versus the cost of that ...
- Bank of Queensland.
- Switzer Home Loan.
- La Trobe Financial.
- Liberty Financial.
- Mortgage House.
- Reduce Home Loans.
- Granite Home Loan.
- Mortgage Mart.
Property purchased through an SMSF cannot be lived in by you, any other trustee or anyone related to the trustees - no matter how distant the relationship. It also cannot be rented by you, any other trustee or anyone related to the trustees.
Can your SMSF become a host and rent residential property on websites such as Airbnb? There is nothing under the Superannuation law that prevents an SMSF from providing host services such as Airbnb.
Conversely, there is no specific rule prohibiting a SMSF to sell a residential property investment to a fund member or a related party. However, the trustees of the SMSF must maintain the transaction on an arm's length basis.
The most common conditions of release are when a member reaches their preservation age (see table below) and retires; when a member ceases an employment arrangement on or after the age of 60; or when a member is 65 years of age (even if they haven't retired).
ASFA estimates people who want a comfortable retirement need $640,000 for a couple, and $545,000 for a single person when they leave work, assuming they also receive a partial age pension from the federal government.
There are varied reasons why trustees may decide to wind up their SMSF which often come about due to a change in circumstances, such as: death of a trustee. disability or illness, resulting in the trustees being incapable of running an SMSF. a lack of time to manage the SMSF.
Super Fund Returns in 2019/20
It says that the median return for a growth fund, which it defines as a super fund with 61% to 80% invested in growth assets, is -0.5%. Reflecting the high volatility, it expects the range of returns to be from -6.0% to +3.0%.
There is no maximum Pension Withdrawal that you can take for a Simple Account Based Pension. There is a maximum Pension Withdrawal amount of 10% of your Pension Balance for a TRIS. Example: For example, assume your SMSF has total assets of $1,000,000.
Can I reimburse myself from my SMSF for the setup costs? Yes, you can. You can transfer $880 from your SMSF bank account to your personal bank account once you have sufficient funds in your SMSF bank account.
For SMSF's that borrowed to buy the property, they are restricted in what they can do. However if the SMSF purchased the property outright, then as the trustees of the SMSF you have full discretion to do whatever you want; renovate, sub-divide, develop, provided it is permitted under your SMSF deed.
The short answer is yes, but be careful. The longer answer is be very careful - it is very easy to trip up and breach one or other of the rules. The ATO is keeping an eye on this area of SMSF investment, and will scrutinise any fund utilising property development.
- Shares (Australian and international)
- Property (Residential and Commercial)
- Overseas investments.
- Term deposits.
- Physical commodities.
- Collectables and personal use assets - The collectable items cannot be used by the members.
|Rank||Security code||Fund name|
|1||PIM4432AU||Orca Global Disruption Fund**|
|2||PIM8122AU||Orca Global Fund**|
|3||PIMM9684AU||Orca Asia Fund**|
|4||PLA0002AU||Platinum International Fund|
This means that neither an accountant, nor any individual, can recommend the set up or wind up of a SMSF without being appropriately licensed under an AFS licence. This includes advice that could reasonably be regarded as being intended to influence a person in making a decision about an interest in a SMSF.
Can you buy property with a self managed super fund? Yes, you are able to buy an investment residential property or commercial property using SMSF, provided you comply with the rules outlined by the ATO.
SMSF loan interest rates
As at the 2021/2022 financial year the ATO sets these rates at 5.10% p.a. for loans used to purchase real property and 7.10% p.a. for listed shares (more background on this can be found on the ATO website).
- Consider appointing professionals to help you.
- Choose individual trustees or a corporate trustee.
- Appoint your trustees or directors.
- Create the trust and trust deed.
- Check your fund is an Australian super fund.
- Register your fund and get an ABN.
- Set up a bank account.