Buying property with Superannuation or SMSF

How to buy property with Superannuation or SMSF

If you are looking to buy property with Superannuation or SMSF you need to know some important details & process. This trend is expected to continue in the years to come. About thirty-three thousand new SMSFs being set up on a yearly basis. Buying property with SMSF is not a new phenomenon and few changes have taken place in the recent years. This has enabled people to use their SMSFs to buy properties they otherwise would not have been able to do.

Using SMSF to keep control over your superannuation

Buying properties with SMSFs should not be the main reason to set up your SMSF. Rather you should use it as an option to keep control over your superannuation. Small business owners will certainly find buying properties through SMSFs to be very beneficial. Over the years a growing number of people have used their superannuation to purchase properties. After SMSFs were permitted to borrow to purchase an asset, things have become much more positive.

SMSF Process of buying property

However, the process of purchasing properties within superannuation is a bit more complicated than investing in properties with other means. Even so, buying property with SMSF is a good way to invest for when you retire and is particularly beneficial for those who still have a long way to go before they retire. With a twenty-year timeframe to contribute to your superannuation you will be in a good position to enjoy the best tax savings. Keep in mind that the rules governing purchase of property within superannuation are complex and your investment is not entirely risk-free. Therefore, before you do anything you must consult and accounting expert or finance or legal expert. Some banks may even require you to get your accountant or financial partner to sign before signing off the deal.

How much do I need to start SMSF?

Before you think about buying property with Superannuation or SMSF there are a few things that you will need to keep in mind. The first consideration is the amount of money needed to get started. A rule of thumb is that you will need at least 30% of property purchase price in current super savings for an SMSF to be beneficial for you. Also, keep in mind that the larger the SMSF the more likely it is that it will perform better than a small SMSF. This is because large SMSFs are more diversified and they can operate in a more effective manner. If you have two hundred thousand dollars then this is sufficient for you to diversify your investments. Diversification is a good idea as then you will not end up putting all your eggs into one basket.

Borrow without risks

Secondly, you need to know what amount of money can be borrowed without incurring too many risks. If you go to a bank then it will probably allow you to borrow about 3/4ths of the value of the property. To be safe, it makes sense for you to borrow at least half the amount available. Depending on lenders you will need anywhere from 20% to 30% minimum in your SMSF balance to purchase an Investment Property.

How do SMSFs benefit you?

Thirdly, you need to know how the SMSF will benefit you. Buying properties with Superannuation or SMSF means that the fund will pay you at most 15 percent tax on whatever rent you receive from your property. And, if the property is held for longer than one year then your fund will get a thirty-three percent discount on capital gains realized from the sale of the property. In other words, your capital gains tax liability will come down to ten percent. Also, as soon as you get your pension when you retire and if you hold your property for a long period of time your fund will no longer have to pay tax on rents received as well as on capital gains when you sell the property.

SMSF is not for everyone

Buying properties with Superannuation or  property with SMSF is however not suitable for everyone. If you do not have a substantial lump sum amount to allow you to diversify your investment then buying property through SMSF is not a good idea for you. Also, it won’t pay for you to borrow through your SMSF if your income is not substantial.

Tax benefits on SMSF

The Australian Tax Office says that when the time comes to invest or buying property through Superannuation or  SMSF then it is important that you purchase your investment on an arm’s length basis and it must also be maintained strictly on a commercial basis. Secondly, the ATO also says that the investment must address the sole purpose test of offering superannuation benefits to fund members.

There are some good reasons to hold a property in superannuation and there are also a few downsides to it. Here is a look at the pros and cons.

Pros – SMSF

1. You can combine your account balances with those of other family members and this in turn will help to increase your purchasing power when you want to invest in a big asset.
2. Secondly, holding property in superannuation also offers some tax benefits. All assets that are used to save for the day when you retire will receive concessional tax treatment. And, if you hold on to your property till the day you retire then the earnings from within your pension phase will not be taxed.
3. It is also possible for you to purchase commercial or industrial properties and then lease them back to your business if you continue paying current market rate rent on the property. In this way, you can free up funds to help expand your business.

Cons – SMSF

1. It is not so easy to diversify your investment, especially if your SMSF owns just a couple of large assets.
2. Setup cost will be higher. In fact, you may have to spend many thousands of dollars in setup costs and sometimes you may also have to pay a high fee to get your loan through the SMSF with lenders.
3. As soon as your superannuation gets transferred to the pension phase you will require enough cash available to fund you pension payments. Otherwise you may well end up having fire sale of your property.
4. Your capacity to borrow will be limited because your bank would typically ask you to provide a personal guarantee. This in turn limits your borrowing capacity.

Summary of SMSF

The bottom line is that buying property through SMSF requires you to manage your SMSF carefully. This in turn means that you should have the expertise, time as well as money to make things work out for you properly. Setting up an SMSF can cost you not just 2000 dollars but you will also need more money to pay adviser fees and accountant fees as well as other continuing annual costs.

Note: It is important to ensure that you have TDP & death benefit insurance within your SMSF. Especially if you are closing your APRA regulated super fund. If you have enough fund in your super fund, it might be wise not to close your APRA regulated fund. You can also open SMSF for voluntary super contribution purposes. Your current fund might require you to leave minimum of $2,000 for your current account to be open if your employer is contributing into that account.

We can guide you through process of purchasing property through SMSF as long as its beneficial for you. Find out more about SMSF on ATO Website as well.

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