Investing in property through a self-managed super fund (SMSF) has grown in popularity in recent years, particularly since it became possible for SMSFs to borrow money to fund a direct property purchase.
This is an area where you really do need to make sure you know what you’re getting into. Here is our guide to buying property through your SMSF.
The tax consequences of buying and renting a property
If you buy a property through an SMSF, the fund is required to pay 15% tax on rental income from the property.
On properties held for longer than 12 months, the fund receives a one-third discount on any capital gain it makes upon sale, bringing any capital gains tax liability down to 10%.
If the property is purchased via a loan, the interest payments are tax-deductible to the fund. If expenses exceed income there is a taxable loss that is carried forward each year and can be offset on future taxable income.
Once trustees start receiving a pension at retirement, any rental income or capital gains arising in the fund will be tax-free.
Note also, that if you make a loss on your property, any tax losses cannot be offset against your personal taxable income outside the fund.
To ‘limit the recourse’ of the lender, a separate property trust and trustee is established to hold the property on behalf of the super fund, outside the actual SMSF structure. All the income and expenses of the property go through the super fund’s bank account. The super fund must meet all loan repayments. If the super fund fails to do this, the lender only has the property held in the separate trust as a recourse, and cannot access any remaining assets of the super fund.
Borrowing criteria for SMSFs
Borrowing criteria for an SMSF is generally much stricter than a normal property loan that you might take out as an individual. The loan also comes with higher costs, which need to be factored in when working out if the investment is worthwhile.
Currently, the general consensus is that most financial institutions will not consider lending to an SMSF unless they have a balance of at least $200,000.
If your primary purpose for wanting to have an SMSF is to purchase property with a mortgage then consulting with a bank or mortgage broker is strongly recommended before you even establish the super fund, to identify if you have sufficient funds to obtain finance.
Remember that loan repayments must be made from your SMSF. This means your SMSF must always have funds available to meet the loan repayments. The SMSF can fund the loan repayments through rental income on the property and through superannuation contributions into the fund.
- Once the property begins to produce a rental income, it will be taxed at 15%.
- If the property is sold (after owning it for more than 12 months), 10% capital gains tax will apply.
- If the SMSF is in pension phase and the sale fits within the member’s $1.6m balance cap, then no capital gains tax is payable.
All of our properties are available for SMSF Packages with the help of industry partners, we can be able to secure the acquisition of the property from the beginning to the end of the process. If you find any of our properties to your liking, you may request that we package it up for an SMSF.
For more information on buying or investing properties using your super you may visit these links:
Understand the rules, costs and risks of setting up a self-managed super fund (SMSF) to invest in residential property.
Acquiring a Property with your Superfund
Gil Elliott is the Managing Director and Founder of Positive Income Properties. Gil has a rich background in business consulting and property investment. All of these he gained in his nearly four decades of experience in the real estate and marketing industries.
