Self-managed super funds (SMSF) are an increasingly popular way to save for retirement, with the Australian Tax Office’s (ATO) statistics showing there were nearly 600,000 SMSFs in March 2021. That’s an increase of 7.8% over five years.
One of the big drawcards of an SMSF is they give Australians complete control over how their retirement funds are invested. So dig a little deeper into the ATO’s data and you’ll find SMSFs owning everything from shares and term deposits to collectibles and cryptocurrency.
Then there’s commercial and residential property – which, combined, make up 16% of the estimated $787 billion worth of assets held by SMSFs over the March 2021 quarter.
And you don’t have to look far to see why property is the fourth most popular asset class for SMSFs. Just consider the most recent CoreLogic home value index which found national housing values lifted 16.1% over the year to July 2021 – the fastest pace of annual growth in more than 17 years.
There could be potential tax benefits too, though these will depend on your personal situation which your accountant can clarify. For example:
SMSFs typically pay only 15% tax on rental income
Capital gains tax will also be discounted from 15% to 10% if the property is sold during the accumulation phase and has been held longer than 12 months
If the fund sells the property during the pension phase, no capital gains tax is payable
That said, buying property through a SMSF isn’t for everyone. It’s also not as straightforward as buying a property in your own name. That’s because the ATO has several rules and regulations surrounding this type of purchase.
SMSF property rules
There are four golden rules you need to be aware of when you buy a residential property through your SMSF.
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
The rules are a little bit different for commercial property. While the property must still meet the sole purpose test, a SMSF can lease it to a fund member or related party. However, it needs to be on an arms-length basis. This means the terms of the lease and the rent charged need to be commercially competitive and at the market rate.
Borrowing money to buy a property through an SMSF isn’t that straightforward either. That’s because you need to use something called a ‘limited-recourse borrowing arrangement’ (LRBA).
LRBAs are designed to protect the SMSF’s other assets should the fund subsequently default on the loan. This does mean they come with more risk to the lender. So not all lenders offer them. And those that do may charge a higher interest rate than a traditional investment loan.
What’s more, if your SMSF loan isn’t set up correctly, you may find yourself in hot water with the ATO. Penalties for non-compliance include fines as well as civil or criminal prosecution. That’s why it’s strongly recommended you work with a financial planner or accountant. They can help you set up your SMSF correctly, and then provide expert advice on whether buying property is the right investment strategy for your fund.
If it is, then Just Imagine Finance is here to help with the loan.
Call us on 0414 673 359 or fill in the online form.