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Acquiring property through an SMSF

Members of a self-managed superannuation fund (SMSF) looking to acquire property through the fund need to be aware of the risks involved in the strategy or risk substantial penalties.

One of the considerations investors should be making if they are deciding to put a property in their SMSF is whether the strategy will improve retirement outcomes. Ultimately, investment decisions, such as the aforementioned strategy, will have ramifications for whether members have a comfortable retirement or need to rely on government support.

SMSF members should also consider the liquidity of the current assets in the fund. As property is a large, illiquid asset the fund should have enough cash on hand to pay day-to-day expenses. If the property is the only asset in the SMSF and it is in pension phase, it may not be able to supply a sufficient retirement income to its members.

Members purchasing property through debt have several restrictions on their investment under the limited recourse borrowing arrangement (LBRA). To establish an LBRA, a 20 per cent deposit is required and enough money to cover stamp duty and legal expenses within the SMSF, or ready to roll over from another super fund.

The fund will be assessed on its borrowing potential based on members’ superannuation contributions and the rental income from the property. Lenders will often require a personal guarantee from the SMSF trustees as the lender can repossess the property if an SMSF cannot meet its repayments.

In addition, if property is purchased using debt any improvements made to the property cannot change the nature of the property. Improvements must be paid for by cash in the fund rather than using further borrowings to pay for expenses.

Investors need to ensure they meet the obligations of the fund, such as having sufficient cash held in the fund. If the member isn’t receiving contributions, or the property is vacant for a period, then the fund will risk becoming a non-complying fund and may face severe penalties.

Posted on 4 April '16 by , under Super.

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Superfund categories and what they mean

There are four different categories of super funds. These have different primary features and are more applicable to certain people than they are to others.

Retail super funds

Anyone can join retail funds. They are mostly run by banks and investment companies:

  • Allow for a wide range of investment options.
  • Financial advisors may recommend this type of fund as they receive commissions or might get paid fees for them.
  • Although they usually range from medium to high cost, there may be low-cost alternatives.
  • The companies that own these funds will aim to keep some of the profit they yield

Industry super funds

Anyone can join bigger industry funds, but smaller ones may only be open to people in certain industries i.e. health.

  • Most are accumulation funds but some older ones may have defined benefit members
  • Range from low to medium cost
  • Not-for-profit, so all profits are put back into the fund

Public sector super funds

Only available for government employees

  • Employers contribute more than the 9.5% minimum
  • Modest range of investment choices
  • Newer members are usually in an accumulation fund, but many of the long-term members have defined benefits
  • Low fees
  • Profits are put back into the fund

Corporate super funds

Arranged by employers for employees. Large companies may operate corporate funds under the board of trustees. Some corporate funds are operated by retail or industry funds, but availability is restricted to employees

  • If managed by bigger fund, wide range of investment options
  • Older funds have defined benefits, but most are accumulation funds
  • Low to medium costs for large employers, could be high cost for small employers

Self-managed super funds

Private super fund you manage yourself. Many more nuances to this type of fund. Most prominent feature is the autonomy over investment.

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