Andre Dixon
Head of Residential and Small Business Finance
Australia’s real estate market has long been regarded as an attractive investment avenue, offering stable returns and potential capital growth. One method gaining popularity among investors is leveraging their self-managed super fund (SMSF) for property investments and acquiring property assets. This article explores the concept of SMSFs, their benefits and considerations, seeking finance for an SMSF, and how SMSFs can be used to purchase property in Australia.
What is a Self-Managed Super Fund (SMSF)?
A self-managed super fund is a private superannuation fund, managed by its members, that provides retirement benefits for its members. Unlike traditional superannuation funds, SMSFs allow individuals to have greater control and flexibility over their investment choices, including the ability to invest directly in property.
Benefits of using SMSFs for property investments
There’s a number of benefits of using your self-managed super fund (SMSF) for property investments including:
Tax Efficiency – SMSFs offer potential tax benefits with the income from the investment property held in the SMSF generally taxed at a concessional rate of 15%. In addition, if the property is held for more than 12 months, capital gains are eligible for a discounted tax rate of 10%.
Diversification – Investing in property through an SMSF allows for greater diversification within the investment portfolio, reducing exposure to risks associated with a single asset class.
Borrowing Capacity – SMSFs can leverage borrowed funds to purchase property, enabling investors to enter the property market with a smaller initial capital outlay.
Capital Growth and Rental Income – Property investments have the potential to generate both capital growth and rental income, providing a steady stream of returns during retirement.
Control and Flexibility – As trustees of their SMSFs, individuals have control over investment decisions, property management, and asset allocation.
Considerations and regulations
Some things to take into consideration when looking at purchasing an investment property through an SMSF are:
Sole Purpose Test – Investments made within an SMSF must pass the sole purpose test, which mandates that the primary purpose of the fund is to provide retirement benefits for its members.
Borrowing Restrictions – If using borrowed funds, strict regulations must be adhered to such as the limited recourse borrowing arrangement (LRBA) rules which ensure the borrowed funds are solely tied to the property purchased.
Limited Acquisition Options – SMSFs can only purchase properties that comply with specific rules, such as that the residential property being purchased cannot be owned by a member of the fund or related parties.
It is recommended you seek professional guidance regarding SMSF property investments. Seeking advice from qualified professionals such as financial advisors, accountants and SMSF specialists is crucial to understand the complex regulations and ensure compliance with all legal requirements.
How does an SMSF seek finance?
One of the key considerations when using an SMSF to purchase property in Australia is financing. While SMSFs can borrow funds to invest in property, it is essential to understand the specific regulations and requirements involved in SMSF finance.
As mentioned earlier, SMSFs can use a borrowing strategy known as a Limited Recourse Borrowing Arrangement (LRBA) to finance property investments. LRBAs allow SMSFs to borrow money for purchasing property, where the lender’s recourse is limited to the property itself in the event of default.
Key considerations for SMSF finance
Seeking professional advice from a licensed mortgage broker experienced in SMSF lending is highly recommended as there are specific restrictions imposed on borrowing within SMSFs. Some things to consider include:
Loan Structure – LRBAs are typically structured as limited recourse loans with variable or fixed interest rates and shorter loan terms.
Loan Repayments – SMSF loans must be repaid from the SMSF’s available funds, such as contributions, rental income, or other investment returns.
Interest Rates and Fees – SMSF loans may have higher interest rates and fees compared to standard residential mortgages due to the additional complexities and risks associated with limited recourse borrowing.
Compliance and Documentation – It is crucial to ensure compliance with all legislative requirements, including documenting the borrowing arrangement correctly and meeting reporting obligations to the Australian Taxation Office (ATO).
Steps to purchasing property with an SMSF
- Establish an SMSF – Set up an SMSF by appointing trustees, preparing a trust deed, and registering the fund with the ATO (your accountant can assist with this).
- Develop an Investment Strategy – Formulate an investment strategy for the SMSF, considering risk appetite, investment goals, and desired property type.
- Financing and Property Selection – Obtain finance pre-approval, keeping in mind the borrowing restrictions, and identify suitable properties that align with the investment strategy.
- Conduct Due Diligence – Thoroughly research and evaluate potential properties, considering location, growth potential, rental demand, and any associated costs.
- Property Acquisition – Execute the purchase transaction, ensuring compliance with all legal and regulatory requirements, including LRBA rules.
- Property Management – Decide whether to engage a professional property manager or self-manage the property within the SMSF.
- Ongoing Compliance – Maintain accurate records, regularly review the investment strategy, and ensure the SMSF remains compliant with all relevant legislation and reporting obligations.
Using Self-Managed Super Funds (SMSFs) to invest in property offers Australians a unique opportunity to harness the potential of the real estate market while enjoying tax advantages and diversifying their investment portfolio. It is however essential to understand the regulations and considerations involved, including SMSF finance and compliance requirements. By seeking professional advice and conducting thorough due diligence, investors can navigate the complexities of SMSFs and make informed decisions to maximise the benefits of property investment within the framework of self-managed super funds.