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Purchase Property in SMSF

Purchasing Property Through SMSF

“Can I use self managed super funds for buying property?” This is one of the most common questions that our clients ask us. The simple answer is yes, purchasing property through SMSF is possible. However, there are many things to consider, so we recommend consulting with a SMSF fund specialist like iCare Super to ensure you understand every aspect of this process.

iCare Super is your local self managed super fund property specialist. We understand the strict laws and rules that you must comply with in order for your property to legally continue providing you with the benefits that such a purchase enables.

The Rules of Maintaining an SMSF

Your self managed super fund property:

  • Must suit the conditions of the ‘sole purpose test’, in that its only purpose is to bestow the account holders with benefits in retirement.
  • Cannot be acquired (i.e. sold or gifted) to the SMSF by any relations of any party member.
  • Cannot be lived in by any member of the SMSF nor fund member’s related parties.
  • Cannot be leased by any member of the fund nor the fund member’s relations.

However, it is possible to use your SMSF to purchase a commercial property to act as your primary business location. You would pay rent to the SMSF based on the going market rate.

The Benefits of Using SMSF for Property Investment

There are numerous benefits that come with using self managed super funds for buying property. These advantages can include:

  • The SMSF can borrow to acquire a property with a value that exceeds its available funds
  • The rental income will be taxed at the concessional rate (15%) when the SMSF is accumulating, and the tax is nil if the SMSF is in pension phase.
  • No tax to pay on the capital growth when you sell the property if the SMSF is in a full pension phase. SMSF only pays 10% capital gain tax if it is an accumulation phase. This is a huge tax saving!
  • SMSF can fund the mortgage payment not only by rental income, but with the SMSF investment earnings, employer contributions and member contributions. For some people, gearing via superannuation may be the only way they can afford to invest into direct property.

What Properties can a SMSF Buy?

A SMSF can buy any sort of property, however the purchase of a residential property must be an arm’s length transaction from an unrelated party. As to commercial properties, there is no restriction on whether you buy from a related party or unrelated party.

Can a SMSF Borrow to Purchase Properties?

Superannuation Industry Supervision (SIS) now allows SMSFs to borrow to purchase real estate. This can be achieved by a limited recourse borrowing agreement between SMSF and banks or related parties. In the event of a loan default by SMSF, the lender only has recourse to the security property and cannot claim any other SMSF assets.

The rules do not prohibit the lender from being a related party. Therefore you and other members can lend money to your own SMSF to enable purchasing property through SMSF. The major lenders in Australia also are offering a range of loan products to SMSFs for investing in property.

How Does a SMSF Invest in Property Through a Limited Recourse Borrowing Agreement?

  • Check the trust deed to ensure it allows borrowing. If not, you need to update your SMSF deed.
  • Any investment in property must be consistent with your SMSF investment strategy.
  • Establish the custodian trust and the property is held in trust for the SMSF which is entitled to its income.
  • Buy the property you like or transfer your own commercial property to your SMSF
  • All rents are paid direct to the SMSF. Loan repayments are made in the ordinary way from the SMSF.
  • When the mortgage is paid out in full, the title to the property can be transferred to the SMSF

It’s important to note that you cannot rent residential property from your own SMSF; however, in some circumstances you will be able to rent a commercial property if it is for business purposes. The rent will have to be at a market rate and the premises will need to be for running your business.

SMSF Costs

Always find out what fees and charges you might be up for when purchasing property through SMSF. Such costs could include:

  • Advice fees
  • Bank fees
  • Legal fees
  • Ongoing property management fees
  • Stamp duty
  • Upfront fees

iCare Super will disclose all fees and charges to ensure you’re never left in the dark when using self managed super funds for buying property.

Our Service

At iCare Super, we have the right resources in place to assist you to apply for a loan to buy the property in your SMSF. If you’d like more control over your superannuation, or simply want more information on self managed super fund property purchasing, please contact us online or call us on (03) 9557 4079.

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