SMSFs are becoming an increasingly popular choice for future retirees. They offer an alternative to traditional superannuation accounts where you park your money until you retire.
SMSF accounts put financial control back into the hands of the account owner. And as an SMSF account owner, you can decide how your money is invested.
This power extends to purchasing investment properties using your SMSF. There are different ways this can be achieved, and it’s always best to consult a financial adviser if you’re unsure how.
However, if you have an SMSF account you’re in a position to buy either a residential, commercial or industrial investment property with or without the support of a mortgage from a lender.
Whether or not you need to borrow money depends on your SMSF balance. And if you do need a loan, there are some rules and regulations around how this is done.
You’re free to choose the type of investment property you want, and the location – as long as your choice is a legitimate investment and can guarantee a return for the fund.
Are there rules around purchasing property using an SMSF?
Buying an investment property using your SMSF is a straightforward enough exercise if you understand and adhere to a few basic rules.
First of all, the investment property under consideration must pass the ‘sole purpose test’ – that is, be for the sole purpose of providing retirement benefits to the fund.
The sole purpose test must also be met in order for the property (investment) to be eligible for the tax concessions normally available to super funds.
The property must be bought and sold at market value (this is the ‘arm’s length rule’). This generally means that the property cannot be purchased or sold to individuals related to the fund in any way.
It’s also important that any SMSF members (trustees of the fund) don’t have use of, or access to, the assets of the SMSF.
Your fund will run into trouble with the ATO if it’s found to provide a pre-retirement benefit to someone – for example, if someone is using the fund asset for personal use.
A measure of the ‘sole purpose test’ is whether the income generated by your fund’s assets shows a true market rate of return.
The benefits of buying property through your SMSF
There are several potential benefits to buying an investment property as part of your SMSF portfolio. For example, it can be a means of accessing cash that you might not have available outside of super to buy property.
If you wanted to combine your superannuation with another family member, you could set up an SMSF in order to get into property investments.
An investment property also presents an opportunity for tax concessions. You might have the option of salary sacrificing additional income to super to pay off the loan quicker from pre-tax dollars.
And if you hang on to your investment property until retirement, you won’t pay tax on the rental income thereafter or capital gains tax if you decide to sell.