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Buying property through your SMSF

Using SMSFs to buy property has become increasingly popular among Australians in recent years, particularly since it became possible for SMSFs to borrow money to fund a direct property purchase.

Residential property

A residential property owned by an SMSF has some limitations as to who it can be leased to.

To buy property through your SMSF, the property must meet the following requirements:

Commercial property

A commercial property owned by an SMSF can be leased to a wider range of tenants than residential properties. Commercial property purchased for business purposes can be purchased from a member of the SMSF or a related entity. This allows small business owners to use their SMSF to purchase the premises from which their own business is run, enabling them to pay rent directly to their fund. This can be preferable to paying rent to an alternate landlord. However, keep in mind that rent must be at market rate and be paid promptly and in full at each due date.

SMSF borrowing

SMSFs can borrow money to purchase a property, however, the borrowing criteria for an SMSF is generally much stricter than regular property loans taken out by individuals. All loans must be undertaken through a limited recourse borrowing arrangement (LRBA). An LRBA involves an SMSF trustee taking out a loan to purchase a single asset, such as a residential or commercial property. Under the Superannuation Industry (Supervision) Act 1993, super fund trustees can use borrowed money to pay for regular repairs and maintenance. However, borrowed money under the LRBA cannot be used for property improvements or renovations that result in the acquirable asset becoming a different asset. This may include adding additional rooms to the property or completely renovating a room.

Tax consequences

Buying and renting property through an SMSF also comes with tax consequences. SMSF funds are required to pay 15% tax on rental income from properties purchased through the fund. However, properties held for over 12 months receive a one third discount on any capital gains made upon the sale, bringing any CGT liability down to 10%.

Expenses such as interest from loans, council rates, maintenance and insurance can be claimed as tax deductions by the SMSF.

As well as this, once SMSF members reach pension phase, any rental income or capital gains arising in the fund will be tax-free.

SMSF property costs

SMSF property sales often attract higher fees that can end up reducing your super balance. Fees and charges can include:

Posted on 13 August '20 by , under Super.

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Transition to retirement

The transition to retirement (TTR) strategy allows you to access some of your super while you continue to work.

You are able to use the TTR strategy if you are aged 55 to 60. You can use it to supplement your income if you reduce your work hours or boost your super and save on tax while you keep working full time.

  • Starting a TTR pension: To start your TTR pension, transfer some of your super to an account-based pension. You have to keep some money in your super account so that you can continue to receive your employer's compulsory contributions as well as any voluntary contributions you may be making.
  • Government benefits and TTR: The benefits you or your partner receive might be impacted if you choose to opt for this strategy. How and what exactly will change might become clearer upon discussing this with a Financial Information Service (FIS) officer.
  • Life insurance and TTR: In some cases, the life insurance cover you have with your super may stop or reduce if you start a TTR pension – check this before making any decisions or changes.

TTR can help ease your mind as you transition into retirement but it can be a bit complex. Before you choose whether you want to use TTR to reduce work hours or save on tax, or even if you want to use TTR altogether, you should figure out how this will impact all aspects of your finances.

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