Using Super To Invest In Property

Jun 20, 2018 | Property Investment

Probably the most exciting opportunity that has recently become available to property investors is the ability to buy property using a self-managed super fund (SMSF).

Before September 2007, legislative restrictions would generally not allow SMSF’s to borrow money to purchase property in Australia. This means that the SMSF could not fully utilise many of the advantages associated with property investing, such as gaining leverage, tax deductions and other benefits. Investors now potentially have the choice to invest their superannuation nest egg directly in property and leverage that investment as they would if investing outside of their superannuation fund.

What are the advantages of buying property in my SMSF?

One of the main benefits of buying property with your SMSF is that investors may be able to buy property with funds already accumulated and without the need to gather the funds for a deposit or remortgage their home. There are more than half a million SMSF’s registered in Australia, many of which may not be aware that they have the capacity already to diversify their investments into a property.

Other advantages of buying property in an SMSF are:

  • Investors can leverage their savings and increase their purchasing power by borrowing up to 70% of the value of property purchases.  This means that their earnings and capital growth can be multiplied by the use of third-party borrowed funds.
  • The fund can absorb all fees and costs associated with property ownership including stamp duty and land tax rather than being funded personally by the trustee.
  • Ongoing expenses such as repairs and maintenance, council and water rates and insurance are all paid by the fund without affecting the investor’s personal cash flow.
  • The SMSF can be structured in such a way so as to ensure effective estate planning and to provide certainty of ownership succession for future generations.
  • A maximum of 10% capital gains tax (CGT) is payable on any capital gain if the property is held for more than 12 months. No capital gains tax is payable if sold during the pension phase (after retirement).
  • A maximum of 15% income tax is payable on the rental income.
  • The asset is protected by the Australian Government against creditor litigation or bankruptcy proceedings in the event of personal financial hardship.

SMSF Borrowing Rules

In general, you can only borrow money to purchase an asset within an SMSF by using a limited recourse borrowing arrangement (LRBA). This means that any recourse the lender has under the loan agreement is limited to the single asset purchased using the LRBA. Although this complicates the borrowing process when compared with standard residential financing, this protects a trustee’s additional assets held in the SMSF. When an SMSF borrows money  to purchase a property, then the arrangement must satisfy the following conditions:

  • The SMSF uses the borrowed monies to buy a single asset.
  • The SMSF can’t use the borrowed monies to ‘improve’ an acquired asset, although the borrowed money can be used to ‘repair’ or ‘maintain’ an asset.
  • The SMSF trustees receive the beneficial interest in the purchased asset, but the legal ownership of the property is held in trust (the holding trust).
  • The SMSF trustees have the right to acquire the legal ownership of the asset by making one or more payments.
  • Any recourse that the lender has under the loan against the SMSF trustees is limited to the single fund asset. What this means is that the lender has a right to call on the personal guarantor for any shortfall after disposal of the original asset.

Does an SMSF suit your situation?

Before making any decisions regarding your superannuation investments, you should first consult a licensed financial advisor. The best way to manage your superannuation requires careful consideration and planning. Otto Property Group recommends that all of its clients consult with their financial planning division before making a decision on how to proceed. Investors should also consider whether borrowing to invest is an appropriate course of action, taking into account the risk and return of the underlying investment and the risk profile of the fund members, the cash flow considerations for the SMSF and whether the super fund is sufficiently diversified to meet its long-term investment objectives.

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Daniel Otto has been a part of the property industry for over 15 years, with experience that stretches across real estate sales, investment, rental management and development.

Please reach out to him if you have any further property related questions.