Yes. You can use your Self Managed Super Fund to invest in a range of assets that comply with the conditions and restrictions of superannuation law. Property is one such asset, but not the only one. Other types of investments like cash, shares and managed funds are allowed too.
However, buying an investment property presents unique challenges for super fund trustees because:
> There’s no specific tax deduction for investing in property inside a super fund; and
> The custodians who hold your SMSF investments might not allow you to make particular kinds of real estate transactions through them (even though they’re still legal). This means you may need to establish a separate self directed super fund to hold your property investments.
What kind of property can I buy?
You can use your SMSF home loan to invest in any legal real estate – residential or commercial, onshore or offshore. You can buy a new property or an established one. Whichever you choose, your investment needs to be capable of providing income and capital growth for both you and your beneficiaries (if you have them).
What about capital gains tax?
Capital gains tax is the main tax concern with respect to property held inside a super fund. This is because if an asset increases in value and it’s sold, the increase (or “gain”) on its original cost base will generally be assessable as a capital gain subject to CGT rules. These rules could create a tax liability for the super fund – and because you’re no longer earning an income from your trust, you can’t claim a deduction against that liability.
This issue becomes particularly significant where SMSF trustees attempt to invest in property using borrowed funds (or “debt”). Because any debt will typically be paid out of sale proceeds when the property is sold, it creates a situation where only some of the capital gain would be taxed at the trustee’s marginal tax rate. The other part may be taxable at as much as 48.5% or even more if it’s “unearned” and not related to earnings from employment undertaken by the trustee.
How should I structure my property purchase?
The best approach is to form a separate self directed super fund to hold your property. This allows you to make a single purchase through the SMSF and establish a single “fund” asset that’s held inside it. Ask one of our advisers for a copy of our guide “How To Setup A Self Managed Super Fund” if you’re not sure how this works.
In addition, having separate funds helps minimise problems with complying with custodian requirements about what types of investments they’ll allow into their SMSFs. In any case, as all trust deeds allow trustees to buy properties as investments there should be no problem – but we always recommend checking first just to be certain.
Who can I pay to help me invest in property?
You can engage almost anyone who’s an expert in property investment (and legal). Real estate agents, accountants, finance brokers and property lawyers are obvious choices. If you’re looking to buy off-the-plan or an established commercial property with significant tenant income, your preferred payment arrangement will probably be different to buying a residential “rental yield” product.
Can I use my SMSF Borrowing for property purchase?
Yes – but there are special rules about how much you can borrow and on what terms. Generally speaking though, these arrangements would need to be done outside the super fund so that any borrowing is undertaken at arm’s length of the trustee(s) just like it would if they were taking out an equivalent loan personally.
