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10 Things You Need To Know When Buying an Investment Property With a Self Managed Super Fund

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Self-managed super funds (SMSFs) have become a very popular choice for Australian investors since superannuation was made mandatory in 1992. According to the stats, the number of self-managed super funds registered is over 1,000 every week.

A SMSF has all the same concessions and tax advantages as the retail, industry and corporate funds in the market. One key difference is the ability to own direct property and have absolute control over an investment strategy. Buying a property in a SMSF can be a great investment strategy to generate long term retirement wealth, but it is certainly not a one size fits all solution for every investor.

Below is an overview of some of the pros and cons when considering purchasing a property through a SMSF.

5 Pros of Buying an Investment Property Using a Self Managed Super Fund

1. Tax-Effective

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A super fund is designed to be your preferred vehicle for retirement savings. As such the earnings within your superannuation fund are taxed at only 15%. This is significantly less than the taxation you would be required to pay in your own personal name.

2. Business Benefits

Through an SMSF structure you can buy a commercial premise and rent it back to your own business (you cannot do the same with a residential property). You must however pay the current market rental rate for the lease, but the revenue goes into your SMSF instead of someone else’s pocket.

3. Increased Purchasing Power

A SMSF can have up to 4 members, combining your capital with the other members of your SMSF can give you extra purchasing power that can be used to invest.

4. Reduced Capital Gains Tax

Property can provide tax benefits when held inside a SMSF structure in relation to CGT. For example, 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 a maximum of 10 per cent.

5. Direct Control

A SMSF is the only form of superannuation structure than you can directly own a property in. Within the SMSF you also have direct control of your own investment strategies, investments, and the overall diversification in your portfolio.

While there are many pros to buying an investment property with a self managed super fund, there are also some cons that should be considered before you go diving in.




5 Cons of Buying an Investment Property Using a Self Managed Super Fund

1. Can’t Leverage Personal Benefits

Investors must understand that transactions through an SMSF must be done at arm’s length. You cannot purchase from, sell to, or rent to a related party i.e. you cannot buy a property for your children to live in through your SMSF.

2. Reduced Diversification

Diversification is the idea of not having all your eggs in one basket. In a smaller superannuation balance <500K a direct property will make up the clear majority if not all the underlying investment. Investors need to be made aware of the additional risk that can be associated with a very specialised investment strategy.

3. Cash Flow Deficiencies

Investors are able to borrow capital to buy property within an SMSF, however you cannot borrow to build or improve the property (capital used for improvements to the asset must be used from existing superannuation savings). Investors need to make sure that their level of contributions and the SMSF’s cash levels are sufficient to cover any costs.

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4. Complexity

Investing in an SMSF property can be a very complex affair and there are hefty penalties for getting things wrong. However, you can seek professional advice to help run the fund and advise you accordingly so that you can navigate through the rules and regulations.

5. Associated Setup and Ongoing Costs

Property investments within the SMSF, particularly with an attached legal recourse borrowing agreement (LBRA), will incur higher set up fees than those bought with cash. Investors need to carefully consider the attached set up costs when purchasing a property through a SMSF. In addition to the setup costs, SMSFs also need to have a tax return and audit completed annually by a qualified and registered tax agent, this is another additional cost to the fund that should be considered.



Is a Self Managed Super Fund Right For You?

Buying investment property through the SMSF is a great way to invest for retirement, but it is important for investors to know whether their financial position suits the strategy. When purchasing property through an SMSF it is advisable for investors to first consider their fund’s capital amount, cash flow and whether any borrowing will occur. Ideally the fund should be large enough to support a property purchase and provide for unforeseen expenses and situation without distress. It’s also healthy for investors to have a measure of diversification in their superannuation investments.

About The Author: Alex Luck

Alex is a highly regarded financial adviser at Financial Framework. His key objective is to create strategies which lead to wealth creation, successful retirement planning and asset protection by making smart, well informed financial decisions on behalf of his clients.

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