Acquiring a Property with your Superfund
A Guide To Buying Property Through An SMSF
Investing in property through a self-managed super fund (SMSF) has grown in popularity in recent years, particularly since it became possible for SMSFs to borrow money to fund a direct property purchase.
This is an area where you really do need to make sure you know what you’re getting into. Here is our guide to buying property through your SMSF.
Investing in residential property
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. So, buying a holiday home in your SMSF and living there during the summer is not allowed.
Further to this, you cannot put an existing residential investment property you have into an SMSF – either by way of the fund purchasing it at market value, or contributing to it within the cap limits.
Investing in commercial property
Generally speaking, investing in commercial premises through an SMSF has some advantages over residential properties. The rules relating to holding residential property in an SMSF very clearly stipulate that the property can’t be rented or occupied by you or any other trustee. It also can’t be rented or occupied by any relation to the trustees.
Investors who think they can purchase a holiday house in their SMSF to enjoy over the summer will need to think again; the rules are clear and strict. Investors who already own an existing residential property can’t transfer the property into an SMSF by acquiring it at market value or contributing it within the cap limits.
While commercial properties can be sold to an SMSF by its members, as well as being leased to SMSF trustees or an individual or business related to them, there are still a host of considerations.
Holding commercial properties in an SMSF is open to all SMSF trustees, not just small business owners. To purchase a commercial property in an SMSF, a fund may apply for a specific SMSF loan. However, the criteria are stricter than traditional lending with tighter loan to value ratios.
Many small business owners use their SMSF to purchase a business premises and then pay rent direct to the SMSF. It’s important to get this right; the rent paid must be at the market rate (no discounts) and must be paid promptly and in full at each due date.
The investment must also satisfy the overarching function of the SMSF, which is to provide retirement benefits for its members (this concept is known as the sole purpose test).
Using your SMSF to purchase premises may make sense for your business. However, to comply with the regulations, you must ensure the purchase provides a retirement benefit for the trustees.
Consider the yield and expected growth in property value. If the property doesn’t shape up, you may need to reconsider.
The tax consequences of buying and renting property
If you buy a property through an SMSF, the fund is required to pay 15% tax on rental income from the property. On properties held for longer than 12 months, the fund receives a one-third discount on any capital gain it makes upon sale, bringing any capital gains tax liability down to 10%.
If the property is purchased via a loan, the interest payments are tax-deductible to the fund. If expenses exceed income there is a taxable loss that is carried forward each year and can be offset on future taxable income.
Once trustees start receiving a pension at retirement, any rental income or capital gains arising in the fund will be tax free.
Note also, that if you make a loss on your property, any tax losses cannot be offset against your personal taxable income outside the fund.
Commercial Cans and Can'ts
Rent is often considered dead money. Given that commercial property purchased through an SMSF can be leased back to the trustees, it makes sense that many choose to pay off their asset, and not a landlord’s.
When investing in commercial real estate, SMSF funds have the option of investing 100% into commercial premises if a member of the fund runs a business. This is an attractive proposition for small businesses who want to own the premises from which they operate. Investors or businesses which already own a commercial property can contribute the property to the SMSF.
The transaction will have to be at market value and is subject to the contribution caps. Keep in mind that transferring property may have capital gains, stamp duty and tax implications, so always get advice before making concrete plans.
When it comes to leasing the property to a related party, it must be done on the same terms as it would with an independent third party. If you were leasing to an independent third party, a lease arrangement needs to be in place, clearly outlining the terms and conditions of standard commercial agreements.
Market rate rent will need to be paid regularly and physically into the SMSF bank, and the property will need to be periodically independently valued.
Those that are cashed up in their SMSF who are looking for a better return than the funds languishing in a slow return bank account are in a great place as if you have Cash to complete a purchase you can sidestep a lot of the paperwork and costs! - FIND OUT HERE: Borrowing to buy property in your SMSF.