The Essential Guide to Self Managed Super Fund Property Investment

A self-managed super fund (SMSF) is a superannuation fund in which the trustees are also the members. If you’re considering investing in property as an SMSF, this guide will help you understand how it works and what to consider before proceeding.

The self-managed super fund is a great way for people to invest in property and share the increased profits of their investments. This guide will help you understand what a self-managed super fund is, how it works, and why you should consider investing all or part of your retirement funds into one.

Investing through your SMSF can offer several advantages over other investment options – such as tax concessions – but it also comes with risks that need careful consideration if they’re not understood.

This guide will give you all the information on how to start investing in property with your SMSF, including what to consider before buying, where to buy, how much should be invested into property each year, when not to buy residential real estate, and other useful tips for new investors.

Let’s get started!

What Are Self-Managed Superannuation Funds?

Control and responsibility sum up the fundamental idea behind the use of a self-managed super fund, which may be stated more succinctly using those two terms.

A self-managed superannuation fund, often known as an SMSF, is a private superannuation fund that its members administer on their own rather than delegating that responsibility to the superannuation fund providers.

In contrast to retail or industry-based super funds, self-managed super funds require all of their members to take on the role of trustee.

Therefore, self-managed super funds are an excellent tool for taking charge of one’s retirement planning.

You are in control of the situation and have the ability to choose how much risk you are willing to accept with your investments, how much money you save for retirement, and what kinds of investments you put that money into.

How Common Are Self Managed Super Funds In Australia?

According to the most recent data from the Australian taxation office, there were over half a million self-managed super funds in the country during the first three months of 2020. This represents a 15% increase when compared to the number of funds that existed five years earlier.

If you’re reading this, it’s likely that you have no idea what SMSFs are, what they do, or how you can use them to buy a property, despite the fact that statistics shows that SMSFs have a massive following and are quite popular.

How Do SMSFs Function?

At the moment, a Self-Managed Superannuation Fund (SMSF) can have a maximum of four members, sometimes known as trustees, who are responsible for making decisions regarding how the super fund functions and where its money is invested.

For instance, the trustees are able to use the SMSF as a vehicle to purchase investment properties so long as they satisfy all of the legal criteria that are associated with the SMSF.

Therefore, with more flexibility comes the increased obligation of ensuring that the SMSF is operating in accordance with the law.

Purchasing Real Estate Using Your Superannuation

If you want to use your retirement savings to make investments in real estate, the first thing you need to know is that you may only do so if you have a self-managed superannuation fund.

Therefore, while it is thrilling to use your retirement savings for real estate investing, you must be prepared to go through the process of establishing a self-managed super fund as well as the administration required to administer that fund.

After you have established a self-managed super fund, you are eligible to make investments in either residential or commercial real estate.

What is the Process of an SMSF Property Investment Strategy?

When it comes to investing SMSF funds in residential property, the most important thing to keep in mind is that the investment strategy must be devised with the members’ best interests in mind and must adhere to the guidelines established by superannuation rules.

In order for the investment property to be in accordance with these stringent standards, it must:

fulfil the requirements of the “sole purpose test,” which states that the SMSF must be established for the sole purpose of delivering retirement benefits;
not be purchased from any members of the fund or any relatives of fund members;
not serve as a place of living for members of the fund or parties affiliated to the fund; and
not be a residence that is rented out to members of the fund or parties affiliated to the fund.

Example:

Both Laura and Zoe are members of a Self-Managed Superannuation Fund (SMSF), which is currently looking to make an investment acquisition of residential property.

Their brother Zachary, who is not a participant in the SMSF, is in the process of selling the apartment he owns in Sydney at this time.

Because the home in question is in a desirable location and is currently available for sale at a price that is not excessively high, Laura and Zoe mulled over the possibility of purchasing it from Zachary.

However, after speaking with their financial advisor, they discovered that they would not be able to acquire property from Zachary because doing so would break SMSF compliance laws regarding the purchase of a relative’s home property.

While the SMSF compliance standards apply to both residential and commercial property, there is some leeway in how you can use commercial property owned by your self-managed super fund.

Example:

A commercial space is an option that may be considered by Laura and Zoe if they jointly owned and operated a small business and were interested in purchasing investment properties.

This is due to the fact that the guidelines for SMSF would enable them to rent the SMSF commercial property as premises in which to carry out their business operations.

How Much Super Should You Have To Create A Self-Managed Fund?

It is not financially worthwhile to manage your find until you have approximately $200,000 in super, due to the amount of administration that is required.

If you have less than that, you need to consider whether or not it is worthwhile to continue. On the other hand, if you are extremely motivated, you may reorganise things to put more money into your retirement account during the course of your working life to reach this stage, knowing that you would be able to achieve your goal then.

You now have the option of employing the services of a superannuation administration company to take care of all of this for you. However, according to what they suggest, you would need significantly more than about $500,000 in your super for this to be worthwhile for you to do.

Rules for Using An SMSF to Invest in Residential Property

If you buy a home using money from your retirement account, you, your fellow trustees, and anyone related to you in any way (regardless of how remote the connection may be) are not allowed to live in the home.

It is forbidden for you, your trustees, and anybody else who is connected to you to rent the property. To be clear, using your self-managed super fund (SMSF) to purchase a vacation house and then living there during the warm summer months is not a smart plan.

It is not possible to put an existing residential investment property into a self-managed super fund (SMSF), either by purchasing it at the going market rate or by donating to it within the allowed contribution caps.

Guidelines for Buying Commercial Real Estate

The use of a self-managed super fund (SMSF) to make investments in commercial real estate rather than residential holdings has various benefits.

When it comes to commercial assets, the rules governing SMSFs allow trustees to occupy those properties, which is not the case with residential real estate. Therefore, any relations to the trustees are eligible to occupy them; nevertheless, before any investments of this kind can be made, there are various aspects that need to be taken into consideration.

A significant number of owners of small businesses make use of SMSFs in order to purchase business premises and then pay rent straight to the SMSF. Even if this is permitted, it is imperative that it be carried out correctly. The renter is responsible for paying rent at the going rate (no discounts are allowed), and it must be paid on time and in full on each day that it is due.

Additionally, the investment needs to be compatible with the overarching objective of the SMSF, which is to offer retirement benefits to the members of the fund.

Utilizing the assets from your SMSF to purchase commercial property may appear to be a prudent course of action. However, it is important to keep in mind that the statutory objective of your SMSF is to offer retirement benefits to the trustees, so make sure that your purchase does this. Conduct an analysis of the anticipated profit and rise in property value. If you are unsure about something, you shouldn’t go to an expert.

Will Your SMSF Investment Property Be Self Managed?

You can’t do that at all. You are required to work with a real estate agent or manager that possesses a valid licence. However, if your investment is located on the Sunshine Coast in Queensland, you can rest assured that we are more than capable of managing this for you.

What Comes Next After You Use Your SMSF to Invest in Real Estate and Rent or Buy Properties?

If you buy a property with a self-managed retirement savings fund, the fund is required to pay a tax of 15% on the income it receives from renting out the property. The fund will receive about 33% of any capital gain it generates from the sale of premises that it has held for more than a year, and as a result, its tax duty will be reduced to 10%.

Interest payments will be contributed to the fund in the event that the purchase of the property is financed through a loan. If the expenses are greater than the revenue, then each year a taxable loss will be carried forward, and this loss can be deducted from any future taxable income.

When trustees reach retirement age and begin receiving pensions, the fund will no longer be subject to taxation on any capital gains or rental income earned by the fund.

The Commercial SMSF Investment Guidelines

When it comes to making investments in commercial real estate, super funds have the ability to put all of their resources into a single commercial property if one of their members runs a business.

For smaller companies that desire to have complete ownership over the locations from which they run their operations, this presents a lucrative possibility.

Contributions of commercial properties may be made to an SMSF by investors or companies that already own such properties, provided that the transaction adheres to contribution caps and takes place at the property’s current market value.

What Advantages Are There?

Using your self-managed super fund (SMSF) to purchase an investment property comes with a number of important advantages. These are the following:

The loan could be partially repaid with the rental income that a property generates.
In addition, payments made by employers to retirement funds can be used towards the repayment of the loan.
Significant tax efficiencies that are uniquely possible in the context of superannuation can be made available to members of SMSFs. These tax efficiencies include:

– After the member(s) retire, there is no tax on capital gains.

– If members sacrifice enough of their salaries, their loan repayments can essentially become tax-deductible.

– The advantages of negative gearing in a self-managed super fund.

– A maximum tax rate of 15% is applied to income that has been reduced by expenses and may include capital gains from the sale of property. This compares to rates of up to 47% that an ordinary investor would be paying on their investments.

Under typical conditions, assets that are held in an SMSF will be shielded from the regular process of debt recovery as well as bankruptcy proceedings.
Your SMSF assets are safe since the lender does not have any legal right of recourse to them in the event of a failure on the loan.
Adding real estate to your investing portfolio can prove to be an effective strategy for lowering portfolio volatility and total risk.

Some Considerations

It is important to have the opinion of an expert. The structure ought to be discussed and established by a qualified legal or accounting professional.
It is necessary for the SMSF investment strategy to be compatible with the property purchase decision.
Any loan arrangements may be subject to personal guarantees, each of which may expose the individual guarantors to the possibility of legal responsibility.

The law governing pensions and other forms of retirement income is convoluted, and as a result, prudent administration and objective guidance are of the utmost significance. When purchasing a piece of real estate with their retirement savings or through a self-managed super fund (SMSF), investors should get legal and accounting counsel before making the investment.

It is essential to have a solid understanding of the fact that sales of properties owned by SMSFs typically attract a higher number of fees and charges than sales of properties not held by SMSFs.

Therefore, prior to signing a contract with any broker or agent, it is essential to obtain an estimate of all of the potential additional charges, which may include the following items:

legal expenses;
stamp duty;
property management expenses; and
bank fees.

We are able to demonstrate to you how to take use of these benefits while mitigating any potential drawbacks. We offer a service solution that gives you complete peace of mind, both in the now and for the future, and it does exactly that.

Is It Possible to Take Out a Loan to Acquire an SMSF Property Investment?

The answer is yes; self-managed super funds are able to take out loans in order to buy investment properties.

You must, however, adhere to the (more) stringent criteria that have been established in order to safeguard the retirement interests of the members of the SMSF.

You are required to set up a limited recourse borrowing arrangement (LRBA) in order to borrow money for the real estate held by your self-managed super fund.

A separate trust is required to be established in order to “limit the lender’s recourse” in accordance with the limited recourse borrowing arrangement. This is done in order to preserve the other assets held by the SMSF.

The property investment is held by the independent trust rather than within the structure of the SMSF; nonetheless, it is still on their behalf. However, the income and costs associated with the investment property will continue to be processed through the bank account belonging to the superfund.

In the event that the SMSF is unable to make the required loan repayments, the lender is only permitted to reclaim the separate property trust; they cannot seize any other assets that are owned by the SMSF.

Borrowing Requirements for Loans to SMSF

Because the purpose of super funds is to save money rather than to accrue more debt, lenders are often more hesitant to lend money to an SMSF.

On the other hand, due to the fact that the debt is used to advance investment savings, they are willing to contemplate lending to an SMSF as long as the fund balance is at least $200,000.

Because your loan repayments are immediately transferred from the funds in your SMSF, you will need to demonstrate that the fund has adequate liquidity or cash flow in order to be able to meet those repayment obligations.

Only the following activities are permitted with the loaned funds:

purchase of a property with one’s own self-managed super fund;
capitalise interest; and
remit payment for necessary maintenance and repairs.

Because of this, you will not be able to take out a loan to pay for any modifications that need to be made to the investment property.

What are Some of the Tax Benefits of Investing in Property Through an SMSF?

One of the most prominent motivations for investors to purchase property through a self-managed super fund is the possibility of receiving tax concessions.

For instance, the portion of your rental income that is subject to income tax that is owed from your SMSF property is only 15%. Therefore, this would be a good tax plan for you to use if you individually fall into a higher income tax band and pay an income tax rate that is greater than 15%.

In addition to this, if you reach the pensions stage in your fund and retire, any rental income or capital gains that emerge from SMSF property will be fully tax-free and won’t be subject to taxation whatsoever.

And if you borrow money to acquire property for your self-managed super fund, then the fund is eligible to claim that interest as a tax-deductible expense, as long as the money was borrowed to buy property.

Last but not least, investment properties that have been held in an SMSF for more than a year are eligible for a capital gains tax (CGT) discount on the sale of the property; as a result, your CGT liability will be reduced to 10% if you sell one of these properties.

SMSF Trustees

Because it is considered a trust, an SMSF is required to have a trustee. There are two possible courses of action here:

Individual Trustees: Each member of the organisation is given the opportunity to serve as a trustee, and the organisation must have a minimum of two trustees.

1. Advantages of having individual trustees

If you choose to have individuals serve as trustees of your foundation, you will face few challenges in terms of administration, and there will be few fees incurred right away. In addition to this, there are many other advantages.

No need for ASIC forms to create the SMSF
No need for ASIC reporting
Fewer directives to follow in terms of procedure due to the fact that it is not required to comply with company constitutions or to hold trustee meetings.

Corporate trustee: A corporation serves as the trustee, and each individual member acts in the capacity of director.

2. Advantages of having corporate trustees

Asset separation: it is easier to ensure that trust assets remain separate from the assets of individual members when the trustees of the trust are corporations.
Management of liabilities: Companies have the benefit of limited liability. As a consequence of this, individual directors of a super fund will not be held personally liable in the event that a corporate trustee incurs any kind of liability (except for extraordinary circumstances). In contrast, persons who volunteer to serve as trustees put their own personal assets at risk in the event that they incur liabilities in their capacity as trustees of the fund. In the event that the individual’s right of indemnification against the fund is inadequate to discharge the liability, then the individual will continue to be responsible for the shortfall.
When it comes to loans, traditional financial institutions have a preference for working with SMSFs that are governed by corporate trustees.

3. Trustees’ obligations in an SMSF

As a trustee, it is your responsibility to make decisions regarding the fund’s investments and to ensure that a solid investment strategy is being correctly implemented.

In addition, super funds come with rigorous administrative obligations, such as the requirement to keep records, provide financial statements, and fill out tax reports.

As a result of this, the majority of trustees opt to retain SMSF specialists to assist them in auditing, accounting, tax reporting, as well as providing investment and financial advice. Having said so, the trustees continue to bear the sole responsibility for the decisions made about their assets and the operations of such funds.

What Is The Price Of An Smsf Property?

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The sale of SMSF real estate may be subject to a variety of charges and fees. Although the sum of their individual costs might not seem like much, the cumulative effect could have a significant impact on your available funds.

Transactions involving SMSF properties may be subject to the following fees:

legal fees
advisory fees
upfront fees
bank fees
stamp duty
ongoing property management fees.

You should steer clear of groups of advisers that advocate each other’s services before committing to a purchase since you need counsel that is accurate and independent before making a decision. In addition, in order to validate the legitimacy of your advisor, you need to make sure that they are in possession of a licence issued by the Australian Financial FFServices.

1. Extended compliance

The assets held by your super fund need to be valued on a regular basis, and the procedure used to evaluate them needs to be based on data that is both verifiable and impartial. For instance, if a self-managed super fund (SMSF) owns commercial property, you will require the services of a registered valuer or a real estate agent in order to obtain an independent and objective valuation.

2. Liability for compliance

Investing in real estate through an SMSF will subject you to a number of stringent laws and restrictions, many of which do not exist outside of the context of superfunds and hence could be new to you. Because the majority of trustees are blissfully unaware of the existence of these requirements until their funds are audited, these regulations are frequently broken.

Because the Australian taxation office will hold you liable for any improper behaviour, the single responsibility that falls on your shoulders as a trustee is to educate yourself about what is and is not permitted by law.

Even if you bring in a third party for advice, it is imperative that you select the specialists who have the highest level of education and expertise if you want to avoid the serious consequences that can result from malpractice. As a result, you are in the best position to make choices regarding the management of your savings for retirement.

3. Repairs and renovations

Borrowed money can be used to cover the costs of doing routine maintenance and small repairs. Nevertheless, let’s say you have plans to perform significant modifications or renovations to the property. In this scenario, the project cannot be financed with a loan or any other type of borrowed money; rather, it must be financed with cash that is already available within the super fund.

Before deciding on a piece of real estate to add to your SMSF, it is in your best interest to undertake a significant amount of research on the market.

Do not let anyone pressure you into making a purchase decision before you are prepared to do so. You should steer clear of questionable offers like free meals and flights because accepting them could leave you open to being coerced.

In addition, prior to establishing a self-managed super fund or making a purchase using the money from such a fund, you should obtain the advice of a certified financial advisor, just as you should do before making any other big financial choice.

Key Takeaways

One of the advantages of exercising control over your SMSF is the ability to make use of it as a vehicle for the acquisition of investment real estate.

Purchasing a property with a self-managed super fund can be a lucrative investment opportunity because of the availability of a variety of tax incentives, as well as the possibility of borrowing money.

However, there are a number of complicated compliance standards and regulations that you are required to stay on top of at all times.

Therefore, you are going to require the assistance of a specialist to assist you in weighing the benefits of the option against its drawbacks.

If you choose to invest in real estate through an SMSF, then we strongly recommend that you seek the advice of a tax professional who will assist you in making the most of the tax benefits that are available to you.

Our principal mission is to provide assistance to real estate investors by assisting them in maximising their prospects and safeguarding themselves while lawfully reducing their tax obligations.

Get in touch with us immediately to talk about everything that has to do with self-managed super fund properties and to arrange your finances so that you pay the least amount of tax possible.