When it comes to using your self managed super fund (SMSF) to purchase residential investment property in Australia, it is important to understand the rules, costs and risks associated. In order to have everything runs smoothly, you must keep yourself up to date with any changes or updates introduced by the government, and ensure that you are adhering to all rules and criteria. Taking this step can be daunting, however can also have great benefits if done correctly, so if you have been considering using your SMSF to purchase an investment property, read on to understand the ins and outs before taking that step.
What is SMSF and Property Investment
First and foremost, before you consider utilising a SMSF, it is important to understand what it actually is, and how it can be used for property investment. A SMSF is a private superannuation fund, that is managed by yourself, and regulated by the ATO. You can generally have up to six members as part of your SMSF, and they have been known to be quite popular among people who are wanting to have greater control over their savings for retirement.
The property must:
meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
not be acquired from a related party of a member
not be lived in by a fund member or any fund members’ related parties
not be rented by a fund member or any fund members’ related parties
Adhere to a Limited Recourse Borrowing Arrangement (LRBA)
How to purchase property under a SMSF
Before purchasing your investment property, you must ensure your SMSF is set up correctly, and is compliant with the regulations outlined by the ATO.
It is also important to create an investment strategy that takes into consideration all elements of this property investment, and then select a property that aligns closely with this strategy.
Considerations could look like:
Analysing the associated risk with the property.
Analysing whether the property will appreciate in value over time?
Analysing if the property is fit to generate rental income?
It is okay if your SMSF does not have enough funds to purchase the property outright, however if you are looking to explore the possibility of a LRBA, it is important to ensure the loan terms comply with the borrowing capabilities of your SMSF.
As these properties can only be purchased for investment purposes, any rental income generated by the property must also be taxed at the concessional superannuation rate.
Pros and Cons
It is always important to weigh up the pro’s and con’s when considering using your SMSF to purchase an investment property.
By investing in property through your SMSF, you are setting yourself up to grow funds for your retirement plan.
In today’s climate, Real Estate can be a highly valuable investment that can see great return on investment.
Specific rules on what property can be purchased in a SMSF.
If you are found to not be complying with the rules of the SMSF and the investment, there will be financial penalties.
Whenever in doubt, contact a professional, as your decision should be based on in-depth research and professional advice about whether this is a wise financial investment for yourself and any other members of your SMSF. For more information get in touch with us.
Let us point you in the right direction and turn your homeownership dreams into a reality.