More than 1.1 million Australians are Self-Managed Super Fund members. Together they hold $2.9 trillion in assets. Many of those assets held in their SMSF is real estate.
This information is current as at June 2020. For updates on Self-Managed Super Fund (SMSF) information, head to the Australian Tax Office’s website. For information on whether an SMSF is right for you, consult your financial advisor or accountant. Do not rely on this blog post; always seek professional advice.
Property is a staple investment for many Australians. Real estate investment can promise stable yields, strong capital growth and tax advantages, especially if you use super to buy an investment property.
Can I use super to buy property?
Yes, you can use super to buy a property. But you cannot use a regulated superannuation fund to do so, like an industry super fund or retail super fund. To buy a property using your super, you’ll need to set up a Self Managed Super Fund (SMSF).
An SMSF is a private super fund that you manage yourself, which is why you might hear it called DIY super fund.
What type of property can I buy in my super?
You can purchase commercial or residential property using your super. But because your SMSF is designed for investments, like a commercial property investment or residential property investment, you cannot live in the property.
The property you purchase in your super must be located in Australia. There is no limit on the property value you purchase in your super fund, and there is no minimum property value.
What are the benefits of using superannuation to buy property?
Strangers to SMSF property investment will be happy to see the range of benefits from using an SMSF to invest in property. If you use super to buy an investment property you could potentially see a few positives (there is no guarantee this applies to everyone – consult your financial adviser before setting up or investing with an SMSF):
Capital Gains Tax (CGT) is most likely capped at 10 per cent for real estate purchased in an SMSF, and reduces to zero per cent in certain circumstances.
Also, interest that your loan accrues is tax deductible for your SMSF. This can help reduce your SMSFs tax obligations.
Pay loan off quicker
With rental income and contributions from your super, you might be able to pay off your loan quicker than you would without these income streams.
Pay yourself rent
If you own a business, you may be able to be your own tenant by buying a commercial property in your super and moving your business into the premises.
Rent can be paid from your business (the tenant) to your SMSF (the landlord).
Strengthen retirement income
Your SMSF captures all income and capital gains from the property investment in your super.
Also, if there is no loan on the property your SMSF owns, you can use rental income to fund your pension account. This investment income might be tax exempt, and is called Exempt Current Pension Income (ECPI).
Should your property investment go awry, the bank is unlikely able to hunt down your home, car or personal savings to repay the loan. This Limited Recourse Borrowing Arrangement (LBRA) is why some people use super to buy an investment property.
Can I take out a property loan in my super?
Yes, you can take out a loan in your super to purchase property as long as your SMSF trust deed permits it (and you are able to gain approval from your financier).
Of course, consult your accountant or financial planner to determine whether you should take out a loan under your super. Your financial adviser may outline the below benefits of taking out a property loan in your super:
Limited Recourse Borrowing Arrangement
Borrowing in your super to purchase property is called a Limited Recourse Borrowing Arrangement (LBRA). This is when an SMSF trustee takes out a loan from a third party lender, like a bank, and uses the money to buy property in a separate trust.
Under LBRA, also known as a non-recourse loan, is that if the borrower defaults or can’t repay the loan, the lender can typically only use assets in the separate trust to repay the debt. The lender usually cannot go after the borrower’s personal assets, like their car, personal savings or home, to repay the property debt.
Borrow in your super for the right kind of investment
If you’re looking to take out a loan in your super to purchase a property, you should consider whether it’s the right kind investment for your SMSF. If your’e unsure, consult your financial advisor first.
SMSFs can be expensive to set up, so you might want to find an investment with strong income to outweigh the expenses.
This is why many investors turn to SMSF commercial property investment: If you’re able to invest in a commercial property offering high yields, this will often offset (or heavily reduce) the costly burden of setting up a Self Managed Super Fund.
Can I invest in an unlisted property fund using super?
SMSFs might be an effective investment vehicle to shelter investment earnings and profit from tax obligations, especially if investing in an unlisted property fund.
We are of course not tax consultants so ensure you talk to your accountant before ensuring its the right investment vehicle for you.
An unlisted property fund, also known as an unlisted property trust or commercial property syndicate, pools money from different investors in order to buy commercial real estate with a high price tag.
As long as an unlisted property fund meets the criteria of the Superannuation Industry (Supervision) Act 1993, you might be able to capitalise on tax effective cash flows and capital growth by using your super to invest.
For more information on investing in property using your super, get in touch Properties & Pathways today.
Properties & Pathways is not a tax or financial adviser, and cannot recommend any investment vehicle to anyone. Consult your tax accountant or financial adviser to see whether setting up or investing with an SMSF is right for you and your financial situation. Any information provided on this website has not considered the objectives, financial situation or needs of any investor; investors should consider whether it is appropriate to them to partake in a commercial property investment prior to investing, in light of their objectives, financial situation or needs.
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