SMSF Property Investment

Buying real estate

Can you buy property with an SMSF?

It is generally fine to include an investment property in your SMSF portfolio, and that property can be commercial or residential. It is important to note that any property in an SMSF is owned by the fund, not the individual members and so there are three important limitations on residential property in an SMSF.

The SMSF must not buy a residential property from a trustee, a relative or another party related to trustees or members unless it does so at market rates;
It can’t be lived in by a trustee, a relative, or another related party except in exceptional circumstances; and
It cannot be used as a holiday home by trustees, relatives, or other related parties except where market rates are paid and usually not in peak holiday periods.

The rules are not as strict for commercial properties.

Is SMSF property investment worth it?

It really depends on the SMSF’s investment strategy and other holdings in its portfolio. However, it must be remembered that someone’s personal investment strategy and SMSF strategy can differ greatly. This is generally due to the effects of negative gearing.

Personal investment portfolios often use negative gearing on borrowings and losses to offset income and capital gains tax. However, SMSFs are only taxed at 15%, much lower than most income tax rates, so the investment strategy is to make a profit and negative gearing is not relevant to SMSFs.

Remember, you can’t offset any SMSF losses against your personal tax.

What’s more, holding an investment property can actually increase the running costs of your SMSF.

SMSF borrowing – tips and traps on loans

The ability for the SMSF to borrow money must be included in the trust deed that was drafted when setting up the self-managed super fund.

Australian superannuation regulations do allow SMSFs to borrow for property, but with a big proviso. The mortgage must be under a limited recourse borrowing arrangement. This means that the other assets of the SMSF can’t be seized if the SMSF defaults on the loan, i.e. the SMSF can’t use its other assets as collateral or security on the loan.

Without that ability, most major banks no longer offer limited recourse borrowing arrangements, and second-tier lenders who do may require a guarantee from the trustee of the SMSF and/or charge higher fees or mortgage rates. This is a complex area and legal advice is highly recommended.

Negative gearing: SMSF vs personal investment

The merits of investing in property often rely on the ability to negatively gear, however, the function of an SMSF can make negative gearing an unfeasible option. Here’s why…

Compare for yourself

Buying property in person	Buying property through SMSF
Matt has an income of $70,000 pa He buys a negatively-geared investment property, which he’ll hold for some years. Matt is able to secure a competitive loan rate from a bank. In the first few years of owning the negatively geared property, Matt can tax deduct the losses at 34.5% through his personal tax. After a number of years, Matt sells the property for a profit, and because it is a personal asset, he pays 17.25% of the profit in capital gains tax.	Prisha also earns $70,000 pa. She buys a negatively-geared investment property through her SMSF, and like Matt, intends to hold the property for some years. As the property involves long-term borrowing, the SMSF can only get a loan using a limited recourse borrowing arrangement, and cannot use other assets in the fund as security. She discovers that the interest rate is more than double Matt’s loan. Prisha sells the SMSF property for a profit at the same time as Matt, and because it is an SMSF asset, the fund pays 10% of the profit as capital gains tax.

Buying property in person

Buying property through SMSF

Matt has an income of $70,000 pa
He buys a negatively-geared investment property, which he’ll hold for some years.
Matt is able to secure a competitive loan rate from a bank.
In the first few years of owning the negatively geared property, Matt can tax deduct the losses at 34.5% through his personal tax.
After a number of years, Matt sells the property for a profit, and because it is a personal asset, he pays 17.25% of the profit in capital gains tax.

Prisha also earns $70,000 pa.
She buys a negatively-geared investment property through her SMSF, and like Matt, intends to hold the property for some years.
As the property involves long-term borrowing, the SMSF can only get a loan using a limited recourse borrowing arrangement, and cannot use other assets in the fund as security. She discovers that the interest rate is more than double Matt’s loan.
Prisha sells the SMSF property for a profit at the same time as Matt, and because it is an SMSF asset, the fund pays 10% of the profit as capital gains tax.

Conclusion

While Prisha was able to take advantage of the lower capital gains tax, it was a once-off advantage. Matt was able to benefit from a much lower mortgage rate for the lifetime of his loan, and better negative gearing opportunities. He also avoided the costs of setting up and managing an SMSF, all of which ate into the returns from Prisha’s SMSF each year.

These are hypothetical examples and should not be relied upon when making an investment decision.

Can I purchase a property from my SMSF?

If you stick to the rules, yes. One important rule is that SMSF trustees must abide by the sole purpose test and act in the best interests of the members. If the SMSF sells a property to one of its members, the sale must be in the best interest of the member’s retirement objectives, so a normal market price needs to be paid. It should be noted that unless the house is worth less than 5% of the assets of the fund it is not possible to rent a property to a member of the fund or a relative of a member of the fund as it is deemed an in-house asset.

Can I use my super as a deposit to buy a house

If you’re a first home buyer, you might be able to use part of your super to help buy a house through the federal government’s First Home Super Saver Scheme – regardless of whether your super is in an SMSF or a regular super fund.