by Andrew Price
Self Managed Superannuation Funds (SMSF’s) are a popular choice for Australians who wish to have a higher degree of control over the investment of their superannuation benefits.
SMSFs operate under the same rules as other super funds, such as retail and industry super funds, but have the potential to allow investment in direct property and control over the fund’s investment strategy.
SMSFs can own properties across both residential and commercial markets. There are rules that must be adhered to in relation to any property investments and you should obtain advice in relation to this before proceeding with any proposed transactions.
The following are some of the main points to be aware of when considering purchasing a property through an SMSF.
Purchasing Business Premises
An SMSF can own the property from which your business operates. The business pays rent to the SMSF at current market values with this being retained as a return on investment by the SMSF. NOTE – this cannot be done with residential property
There is also the potential that an SMSF can acquire existing commercial properties from members. This would allow the SMSF to benefit from the lower super tax concessions whilst renting the property back to the business.
SMSF’s (together with all super funds) have a lower concessional tax rate on earnings. Any rent received in super is taxed at 15%, which is lower after retirement. Any capital gains on a property sold is taxed at 10% where properties are held for longer than 12 months. This is potentially lower than tax that would be paid by the members if the property is held personally.
An SMSF is the only form of superannuation structure that allows investment in direct property. An SMSF allows you to have direct control over the investment strategy of the SMSF and assets invested to allow an overall diversification of investments.
An SMSF is currently allowed to have up to 4 members. This allows a family group to pool their super benefits to potentially buy a larger property than they would individually.
Complexity & Costs
An SMSF is a complex vehicle with continuing compliance requirements to be carried out which can lead to large penalties for getting things wrong. You are able to seek professional help in establishing and managing an SMSF on an ongoing basis so you can meet your obligations under the super rules and regulations.
Investment through an SMSF can be more costly than investing through other vehicles. This is especially the case where the SMSF borrows funds to invest through a Limited Recourse Borrowing Arrangement (LRBA). The SMSF is required to prepare annual accounts and have them audited which often results in higher ongoing costs than other superannuation options.
All investments made by an SMSF must be made solely for the purpose of providing retirement benefits to members. The members are prohibited from obtaining benefits before retirement. As such all transactions must be made on an “arm’s length basis” without any favourable terms or benefits being enjoyed by the member of SMSF.
Investing in SMSF is a complex area. The above is provided as general advice only. You should seek professional guidance before progressing with any investment in property through an SMSF. This is not an area that may be suitable for everyone.
How We Can Help
If you would like to talk to us about purchasing property through an SMSF, contact Andrew Price below or on 02 4969 6600 for a complimentary initial discussion.