Buying a property with your SMSF

There are several ways to break into the housing market. Setting up a self-managed super fund (SMSF) to invest in a residential property is becoming one of the viable methods many Australians consider.

Buying a commercial property using SMSF

While still on the subject of investing using SMSF, commercial properties are generally more popular among investors using the superannuation strategy.

Using SMSF to buy commercial properties also has the same restrictions as purchasing a residential property. However, as mentioned earlier, SMSF members are allowed to lease commercial assets for their businesses, provided that they pay market rent.

If you are buying a commercial property using SMSF, here are some of the things you need to keep in mind:

• The term of your commercial lease must meet the current market conditions — you cannot use the property to save up on costs.

• You will be required to get regular valuations on the property to ensure that you are paying your lease at an appropriate market value.

• You must be diligent in paying rent — the rent must be paid in full every time.

It is a must that you comply with these rules to ensure that your SMSF remains compliant with the rules of the ATO.

Is it worth it to buy a property through an SMSF?

For many investors, the motivation for buying a property through an SMSF is not limited to boosting retirement funds. The tax incentives for doing so are also a factor attracting many to set up their SMSFs and start their investment.

As a general rule, super funds, including SMSFs, are generally taxed at 15% in the accumulation phase — this is well below most Australians' marginal tax rates.

Meanwhile, any capital gains on the property could be taxed at a discounted rate of 10%. This would further bring down your taxable income.

Buying a property with your SMSF is a viable strategy, but doing so might be complicated.

It is best that you seek the help of an expert to ensure that you go through the process smoothly and you avoid paying fees due to potential non-compliance.

What are the SMSF property rules?

While SMSF can be used to purchase or invest in property, you will need to make sure that the asset complies with these rules:

• The property must meet the “sole purpose test”, under which the asset should only provide retirement benefits to fund members.

• The property must not be purchased from a related party of the fund members.

• The property must not be used as a primary place of residence by fund members or their related parties.

• Fund members and their related parties are not allowed to rent the property for themselves.

Fund members can lease the space for their businesses for properties with commercial premises.

The Australian Taxation Office has a list of other rules when investing using SMSF.

Securing an SMSF loan

Borrowing an SMSF loan for your purchase of the property requires you to meet a set of criteria. Typically, lenders will assess whether you meet the following:

• Your deposit must be around 30% of the property’s value.

• Your expected rental income would be enough to cover repayments.

• Your patterns of contributions will be used as an indicator of your capacity to meet repayments.

An important thing to note when borrowing SMSF loans is that they must be undertaken through a limited recourse borrowing arrangement (LRBA).

Under an LRBA, a separate trust and trustee must be set up to minimise risks to other assets within the fund.

When an SMSF can no longer make repayments and falls into arrears, the lender will likely seize assets owned by the funds under the arrangement.

With the LRBA, the lender will not be able to pursue assets within the SMSF.

When borrowing an SMSF loan using an LRBA, it is highly advised to reach out to a mortgage broker and an accountant to guide you through the process.

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