Australian’s have a long-standing love affair with property investment. If you have been thinking of buying a property and have been considering using your superannuation to do so then you are not alone. Using your super for property investment is an option, but it’s not a decision to take lightly.

Firstly, regular super funds don't allow direct property ownership. To invest in property through super, you'll need a Self Managed Superannuation Fund (SMSF).An SMSF obviously gives you more control over your investments but it also means increased responsibility for making decisions over your superannuation funds, managing the funds and ensuring that your fund complies with regulations in relation to investments it makes and how the fund operates.

Rules when investing in an SMSF

A Self Managed Super Fund can certainly invest in property, providing the trustees ensure that the investment complies with many strict rules. The most crucial of these rules is the “sole purpose test” which requires Trustees to ensure that the fund is maintained to provide benefits solely for retirement, ill health, or death.

Other rules are determined by the type of property you intend to invest in:

Residential property

A superannuation fund can invest in residential property however if you are harboring dreams of purchasing a holiday unit at the beach with your superannuation then think again. If you want to use it for your personal enjoyment, then it isn’t allowed – even if you are prepared to pay the superannuation fund the regular rent. You also wouldn’t be able to rent it out to family because an SMSF property can’t be lived in by you, or any other trustee, or anyone related to them.

Commercial property

Commercial property investments such as warehouses, office buildings, retail stores (shops), hotel, motels or even farms all are eligible investments.

Unlike residential property, your business would be able to use the commercial property if it was owned by your SMSF but only if you engaged with on normal commercial terms paying market rent.

Can an SMSF borrow to purchase a property?

If you don’t have enough funds in your super to buy a property outright, your SMSF can borrow money to purchase a property using a limited recourse borrowing arrangement(LRBA).This is s special type of loan for SMSFs that allow you to borrow funds to purchase a property. The property is held in a separate trust to protect your other super fund assets until the loan is repaid.

It is important to note that the SMSF can’t borrow to build or improve an asset. Therefore the property would need to be a pre-built property on a single title if the SMSF needs to borrow to buy.

Benefits of using your Super to buy a property

In the right situation, investing in property through superannuation offers several benefits:

Control Over Investment:

An SMSF offers more control over your investment choices compared to a regular super fund. You can choose the specific property you want to invest in.

Tax Advantages:

Rental income earned by the property within the SMSF is taxed at a concessional rate (typically 15% but potentially 0% on your retirement) compared to your marginal tax rate outside of super. This can lead to significant tax savings over time.

If the property value increases over time, you may benefit from capital gains when you sell it. Within the SMSF, capital gains tax may be discounted or even exempt depending on your situation.

Asset growth:

SMSF property investment give you the ability to use your superannuation savings to purchase a property investment

Portfolio Diversification:

Property adds a different asset class to your super portfolio. This diversification can help spread risk and potentially improve the overall performance of your retirement savings.

Investing in property through an SMSF can be enticing due to the tax advantages and potential for high returns. However, regulatory rules require careful navigation.

This can be a complex area so seeking professional financial advice is highly recommended to understand if this strategy suits your situation and complies with regulations.

If you are considering property purchase within your SMSF, reach out to us today. Our team is here to provide personalized advice, ensuring your investments align with your retirement goals and regulatory requirements. We are committed to helping you achieve your financial aspirations with strategic and compliant investment solutions.