Invest in property through your SMSF and enjoy tax benefits, flexibility, and control. Learn more about SMSF property investment!
Using Your Self-Managed Super Funds [SMSF] for Property Investment
Investing in real estate has proven to be a rewarding venture for Australians, offering the potential for generating additional income through both residential and commercial properties.
If you’re considering purchasing property as an investment, it’s essential to recognise that acquiring the necessary funds for the down payment and initial expenses can pose a significant financial challenge.
Fortunately, one often-overlooked avenue for financing your investment property is utilising your superannuation funds. While this option isn’t always top of mind for property buyers, leveraging your super funds can be a smart strategy. Before proceeding with this approach, it’s crucial to thoroughly review this straightforward guide.
Can You Use Super To Buy Property?
While it is possible to utilise a super fund for property acquisition, not all types of super funds permit this investment strategy.
Distinct regulations apply to purchasing property with super funds, depending on whether you intend to use the property as your primary residence or as an investment property for rental income. It’s essential to recognise that accessing the funds you require from your super and using them to buy your chosen property may not be a straightforward process. Also check: 5 Reasons to Buy Property in Melbourne Now
Superannuation funds encompass various categories, but the primary differentiators are regulated superannuation funds and self-managed super funds (SMSFs). Regulated superannuation funds include retail, corporate, public sector, and industry funds. In contrast, an SMSF allows you to take charge of your investments instead of relying on a fund or investment manager to make those choices. With an SMSF, you are expected to possess expertise in fund management, making investment decisions that may extend beyond specific industry sectors or company types.
If your goal is to acquire a property, you can withdraw funds from an SMSF for this purpose. However, you cannot employ your for-profit or profit-to-member investments, such as those found in regulated superannuation funds, for this purpose.
What Kind of Property Can You Buy With Super?
The types of property you can buy with a super fund are limited. With a self-managed super fund, you can buy commercial investment properties or a residential property you don’t intend to live in.
Using SMSF To Buy Property
When utilising a Self-Managed Super Fund (SMSF) to purchase property, it is imperative to adhere to a set of rules and considerations. Prospective property owners must familiarize themselves with these regulations before proceeding with a property investment to avoid potential penalties and legal repercussions associated with misusing superannuation funds.
1. Sufficient Funds and Budgeting:
While there is no mandatory minimum balance for setting up an SMSF, it is essential to have adequate funds and cash flows to cover property expenses and various account fees. These fees can encompass investment-related expenses, operational costs, management and administrative fees, audit fees, and annual fees imposed by the Australian Securities and Investments Commission (ASIC). Proper budgeting and ensuring that investments generate enough income to cover these expenses are crucial.
2. Fund Membership
An SMSF can include anywhere from one to four members who collectively make decisions regarding the fund, including investment choices. While investing in shares is an option based on members’ financial preferences, property investment is often favored due to its potential for higher returns and stability.
3. Trustees and Compliance:
An SMSF requires trustees who can be selected from among the fund’s members. Trustees, whether individuals or corporate entities, play a critical role in ensuring compliance with all regulatory requirements.
4. Allocation of Funds:
Not all funds within your super balance can be used to invest in property. A portion of your super must be retained as a liquidity buffer, typically representing 10% of the property investment value. This buffer is necessary for specific cash and share investments.
5. Financing and Interest Rates:
Banks or lenders typically extend a lower loan amount to the SMSF compared to individual buyers, usually around 60-70% of the total property value. Additionally, the interest rates offered to an SMSF may be higher than those offered to individual buyers.
6. Prohibited Transactions:
There are restrictions on related parties and fund members engaging in certain transactions with an SMSF, especially when it involves buying an investment property. Related parties include entities such as trusts controlled by a fund member or their associates, companies influenced by a fund member or their associates, relatives of fund members, business partners of fund members, spouses and children of fund members’ business partners, and employers contributing to fund members’ superannuation funds. Compliance necessitates full and timely disclosure of any related party transactions due to the extensive list of potential related parties.
Adhering to these rules and considerations is crucial for maintaining the integrity of your SMSF and ensuring compliance with the regulations governing superannuation fund investments in property.
Tax Advantages
By purchasing property through an SMSF, you can potentially enjoy tax benefits. Rental income generated from the property is generally taxed at a concessional rate of 15%, and if the property is held for more than 12 months, any capital gains upon sale may be eligible for a discounted tax rate of 10% or 0% if in pension phase.
Potential for Capital Growth
Melbourne has historically experienced strong property market growth, which can potentially lead to capital appreciation over time. This can contribute to the growth of your retirement savings. Know more..
Rental Income Stream
Owning an investment property in Melbourne can provide you with a regular rental income stream. This income can be reinvested within your SMSF, helping to grow your retirement savings further.
Using borrowed funds within your SMSF to purchase property can allow you to leverage your investment. This means you can potentially acquire a more valuable property than if you were solely using your own funds, potentially increasing your returns.
Seek Professional Advice
It’s important to note that investing in property through an SMSF comes with certain rules and regulations. It’s advisable to seek professional advice from a qualified financial advisor or SMSF specialist to ensure you comply with all legal requirements and make informed investment decisions.
Remember, investing in property carries risks, and past performance is not indicative of future results. It’s crucial to conduct thorough research and consider your individual circumstances before making any investment decisions.