Purchasing Property In Your SMSF
Australians love investing in real estate, so it is no surprise that many people have used their retirement funds to purchase a property within their SMSF.
Self managed super is the fastest growing sector within the superannuation industry, and this is partly driven by the ability to invest in different assets such as property.
How It Works
The concept behind purchasing property within an SMSF is quite simple. The property is purchased in the name of the super fund using money from the fund, and all rent from the property is then paid back to the fund.
An SMSF is able to invest in a range of property including residential, commercial, industrial and retail. There are however a number of restriction which apply to property investment, each of which will be covered further in this guide.
In the past an SMSF could only purchase property using its own funds, which meant that the super funds of many Australians were not large enough to support such a purchase. Today however an SMSF can borrow money, which has opened up the property investment option to many more people.
Borrowing To Purchase Real Estate
An SMSF can borrow money just like anyone else to purchase an investment property. In this case the deposit must come from the fund, along with all monthly repayments.
SMSF borrowing is generally restricted to 80% of the value of the property to be purchased, meaning that your fund must have a balance sufficient to cover a 20% deposit plus any additional costs. It is also prudent to ensure you have a healthy cash buffer within the fund to cover any emergencies.
All loan repayments must be made by the fund, so if the rental income is not sufficient to cover the repayments, you will need to make additional contributions to your fund or have a balance sufficient to cover the repayments on an ongoing basis.
Recent changes to the superannuation rules now allow an SMSF to borrow money for renovations to any property owned by the SMSF. This change has made property investment even more popular now that you can improve the value of the property using borrowed money.
As with all SMSF investment types there are a number of restrictions that apply to investment properties.
The general rule is that you and your family cannot receive any benefit from an investment property owned by your SMSF. This is a part of the ‘sole purpose test’ which applies to all SMSFs, and means that all assets must be held for the sole purpose of providing retirement benefits to the fund members.
A common trap is the holiday home. An SMSF can purchase a property to be rented out to others as a holiday home, however if you or your family decide to stay in the property for any period of time it will no longer meet the sole purpose test.
Whilst most property investments within an SMSF must not involve a related party, there is an exception when it comes to business premises.
A business owner can purchase his or her own business premises within their SMSF, provided that they pay full market value rent from their business to their SMSF. This is a popular option for business owners seeking more security over their business premises.
There are serious penalties for getting your property investments wrong within an SMSF, so if you are unsure of a particular investment or strategy you should seek advice from your financial adviser or accountant.