Property and your SMSF

06 Mar 2013

The rules on investing in property through your SMSF have been relaxed over the past few years, however you still need to be aware of the regulations and comply with them.

According to an article published in Adelaide Now in January investing in residential property through an SMSF jumped to more than $15.5 billion, up by 45 per cent. 

While share market losses caused by the Global Financial Crisis (GFC) did impact on the increase in property investment, the most significant influence has been the changes in borrowing rules which now allow an SMSF to take out a loan to fund an investment. Perhaps another influence has been the reliance of bricks and mortar. You can see and touch your investment; it’s relatively safe.

How to invest

An SMSF is allowed to purchase either residential or commercial property, however when it comes to residential property, it must be an investment. This means you cannot live in it. 

One of the most stringent rules by the Australian Taxation Office states that the investment must be kept at “arms length” meaning the tenant must be a non-related third party. This ensures that you do not directly benefit from the asset until you retire, fitting within the constraints of a normal superannuation fund.

Commercial properties work slightly differently. If you invest in a commercial property through your SMSF prior to retirement, you can indirectly benefit from the use of the property via your business. This means your business pays rent directly into your SMSF becoming your own tenant. 

You must make sure that you pay off any loan you take out prior to retirement. If the loan isn’t paid before you retire, cash flow from other investments will need to finance it, which may not be ideal.

Buying property: the pros

There are plenty of benefits to using your SMSF to purchase a property. You take control away from someone else managing your fund and choose how you invest your money. Plus, the return on a property investment can be greater than interest earned through a regular superannuation fund if the appropriate investment strategy is used. 

Using your superannuation also provides the best tax structure so you’ll gain more while avoiding the hefty tax bill. This means you’ll be exempt from capital gains tax if the property is sold once you’ve reached pension stage. Also, the rental income is capped at 15 per cent tax and once you hit pension age, income derived through the property is tax-free.

Buying property: the cons

Firstly, a lot of SMSFs can be heavily invested in property and light in other assets. It’s always a good idea to have a mixture of assets including cash, shares and property so no matter what happens with any market, you’ve got some assets protected. 

Another con is that property isn’t a liquid asset. You can’t sell just a bedroom, so if you want to get rid of the asset, you need to get rid of it in its entirety. Also, rent and therefore income, is only derived if there is a tenant occupying the property.

Of course, rules and regulations constantly change. With the current superannuation laws, there are stringent rules that you need to abide by so it’s always best to get sound advice from someone in the know when it comes to investing your money. And remember to stay on top of superannuation regulation, because anything can change at any time.