26 Aug Is SMSF Property Investing a Good Option for You?
Australian investors now have the opportunity to use their Self-Managed Super Fund (SMSF) to invest in residential property.
This can be an effective way of building wealth, although it’s important that you understand the responsibilities and risks involved.
However, SMSF property investing is not an appropriate model for all investors. In this Power of Property blog, we look at the advantages, obligations and key considerations to help you decide whether it is an appropriate option for you given your investing goals.
What is an SMSF?
A Self-Managed Super Fund is a private superannuation fund that you manage yourself, and which gives you greater control over your investment decisions, including the ability to invest in property.
The Australian Taxation Office (ATO) reports that there are currently more than 600,000 SMSFs in Australia, many of which hold direct property assets as part of their portfolio.
It is, however, important to note that SMSFs are highly regulated and there are strict legal and tax obligations with which you are required to comply. Notably, the goal of the fund must be to provide retirement benefits for fund members, and not be used for personal use or short-term gain.
Using an SMSF to Buy Property
Both residential and commercial property can be purchased through an SMSF fund, but there are number of rules and restrictions in place.
The property must meet the sole purpose test (i.e., to provide retirement benefits to fund members).
It must not be acquired from a related party (except in the case of some commercial properties).
It cannot be lived in by a fund member or related party.
It cannot be rented to a fund member or related party.
For example, buying a residential investment property and renting it out to tenants is permitted. However, buying a holiday home and occasionally staying there yourself is not.
Benefits of SMSF Property Investing
Tax Advantages
One of the major advantages of using an SMSF to purchase property is the favourable tax environment. Income from SMSF is generally taxed at just 15%, and if the property is held until after the fund enters the pension phase, any capital gains can be tax-free.
Leverage Opportunities
SMSFs can use a Limited Recourse Borrowing Arrangement (LRBA) to borrow money in order to purchase property. The fund can then leverage existing capital to invest in higher-value assets, while limiting the lender’s claim to the property in case of default.
Diversification and Control
Having property in your retirement portfolio means that it is diversified beyond shares and managed funds. In addition, you have complete control over the choice of asset as trustee of your SMSF, as well as its management and long-term strategy.
Ownership of Business Premises
Business owners can buy commercial premises through an SMSF and lease it back to their own company. This allows for security of tenure and control over tenancy arrangements, while building retirement wealth at the same time.
Risks and Limitations of SMSF Property Investing
Setup and Ongoing Costs
SMSFs require a significant upfront investment, and the setup, legal, accounting and compliance costs can be considerable. Additionally, maintaining compliance can be time-consuming and expensive.
Borrowing Restrictions
Lending to an SMSF is more restrictive than standard lending. Loan-to-value ratios (LVRs) are generally lower, and lenders may require personal guarantees. Refinancing an SMSF loan is also more complex.
Lack of Liquidity
As property is not a liquid asset, it can become problematic if the fund needs to pay out member benefits or meet other financial obligations.
Compliance Risks
Breaching SMSF rules—even unintentionally—can result in harsh penalties, including loss of concessional tax treatment. You must ensure your fund adheres to all ATO regulations and reporting requirements.
Who Should Consider SMSF Property Investing?
SMSF property investment suits investors who:
– Have an SMSF balance of at least $200,000–$300,000;
– Are comfortable managing compliance and working with financial professionals;
– Understand long-term investment strategy and are not looking for quick returns; and
– Have an interest in property as an asset class.
If you’re unsure whether your circumstances are suitable, it’s crucial to seek advice from experienced SMSF and property investment professionals.
How Power of Property Can Help
Michael Lawton and Danielle Charlton at Power of Property in Adelaide have helped numerous clients successfully navigate the complexities of SMSF property investing.
– With many years’ experience in property markets, Michael and Danielle can guide you through:
– Assessing the suitability of SMSF property
– Developing a property portfolio strategy
– Finding suitable property and conducting due diligence
– Working with appropriate financial and legal advisers
Power of Power takes a personalised approach to property investing, using high level market research to ensure SMSF property investment aligns with your long-term financial goals and retirement strategy.