Can I Buy A Property With My Smsf?

Superannuation is full of the terminology, but one term that's used quite a bit is "real business property". In a nutshell, it means property that's used by a business – for example, a factory, a shop or an office – as opposed to "residential property" which is property people live in.

Self-managed superannuation funds (SMSFs) are actually allowed to invest in both types – commercial property (or real business property) and residential property. So why does it matter how the property is classified?

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

Business real property is a crucial piece of superannuation language and has a particular meaning.

There are two occasions when SMSF trustees care a lot about whether a property is real business property.

The first is when the fund is first acquiring the property. If it's a real business property, the SMSF can acquire it from people or entities known as "related parties".

Acquisitions from related parties are not permitted if the item in question does not constitute actual company property. Related parties include members of the SMSF, their families and other people with whom they have a partnership, as well as companies and trusts that they or their family control. The legal definition of related parties takes up several pages, but in a nutshell, they are members of the SMSF, their families, and other people with whom they have a partnership. For instance, if a Self-Managed Superannuation Fund (SMSF) were to buy a piece of real estate from one of its members or, say, their family trust, this would constitute the fund purchasing the asset from a related party. In that scenario, it would be vital for the property in question to be classified as commercial real estate.

In recent years, there has been a rise in the number of people choosing to make investments in real estate through a self-managed super fund (SMSF). This trend has been fueled in large part by the fact that SMSFs now have the ability to borrow money in order to finance the direct purchase of the real estate.

This is an area where you do need to make sure you know what you're getting into. Here is our guide to buying a property through your SMSF.

Thousands of investors in Australia have taken control of their retirement savings accounts and are now putting their money into the real estate market.

Self-managed super funds, also known as SMSFs, have overtaken all other asset classes in terms of size in Australia. According to statistics from 2013, there are currently more than a thousand self-managed super funds being registered in Australia on a weekly basis.

This comprehensive blog discusses the benefits and drawbacks of self-managed super funds (SMSF), provides answers to frequently asked concerns, and explains how individuals who are interested in pursuing this strategy can learn more.

What exactly is a Self-managed Super Fund (SMSF)?

The provision of retirement benefits is the sole function of a self-managed super fund, which is defined as a fund that is founded by one to four people and solely serves that function.

The primary distinction between SMSFs and retail, corporate, or industry super funds, as well as one of the primary draws for many individuals, is the ability for members to exercise personal control over the assets that are invested. SMSFs enjoy the same financial benefits and concessions as these other types of funds.

The trustees are in charge of making investment decisions. They have the ability to devise a variety of financial strategies that are tailored to meet the individual requirements of each member, as well as the ability to modify these approaches as the environment around them evolves. The capacity to swiftly and decisively respond, in the event that an investment opportunity presents itself, is a distinct advantage.

Because the members are also the trustees of the fund, it follows that they have complete authority over the fund's investments and are accountable for the choices made regarding those investments.

What Kinds of Real Estate Can Be Bought With an SMSF?

With an SMSF, you can buy property in either the residential or commercial markets. However, any property that your SMSF owns must be utilised to either give retirement benefits to fund members or a benefit to members' dependents in the event that a member passes away before retirement age in order for your SMSF to pass the sole-purpose test.

Residential Property

It is permissible for SMSFs to make residential property investments so long as they do not purchase the property from a connected party of a member of the fund.

For instance, you cannot use your retirement account to acquire ownership of the family house. You are not permitted, either, to rent a residential property that is owned by your SMSF to a member of the fund or to any related parties of that member.

You could purchase a rental property as an investment and then rent it out to renters who are not supported, members, or relatives of your family. You, any other trustee, or anybody related to the trustees in any way, shape, or form is not allowed to live in a property that was purchased with an SMSF, regardless of how remote that relationship may be.

Renting the property is not allowed for you, any other trustees, or anybody else connected to the trustees in any way. As a result, you are not allowed to utilise your SMSF to buy a holiday home and then live there full-time during the warm months of the year.

In addition to this, you are not permitted to transfer an existing residential investment property that you own into an SMSF, either by having the fund purchase the property at its current market price or by making a contribution to the property within the permitted limitations.

keys handed over in front of double storey home

Real Estate for Business Use

It is acceptable for SMSFs to make investments in commercial real estate, which may include the proprietor's own place of business.

Even though the property must still pass the sole-purpose test of providing retirement benefits to the fund's members, a self-managed superannuation fund (SMSF) may, in the case of commercial property, buy the property and then lease it back to a member of the fund or a related party of the fund, including the member's business. This is permitted so long as the property meets the sole-purpose test.

When acquiring and/or leasing property to a member or linked party of the fund, it is especially crucial to have a sale price and lease arrangement that are not related to one another in any way.

We strongly suggest that you discuss the possibility of using your retirement savings to purchase a home with a qualified financial adviser before making any final decisions.

Purchasing commercial real estate rather than residential real estate through a self-managed super fund (SMSF) comes with a number of advantages in comparison to investing in residential real estate. There is no way for you or any other trustee to rent out or live in a residential property that is owned by a self-managed super fund (SMSF), as doing so is expressly prohibited by the laws that govern this type of investment. These laws prohibit trustees from living in any residential property that is owned by an SMSF. Additionally, members of the trustees' families are prohibited from renting or otherwise occupying the property in any form.

Because the standards are so particular and severe, investors who assume they can use their self-managed super fund (SMSF) to purchase a vacation house that they can use during the summer should rethink their position. It is not possible for investors who already own a residential property to convert that property into an SMSF by either purchasing it at the current market value or donating it within the authorised limitations. Either option would require the investor to start a new investment.

Even though members of an SMSF have the ability to sell commercial properties to the fund and also to lease properties to SMSF trustees or an individual or company that is affiliated with them, there is a wide range of things to think about. This is the case despite the fact that members of an SMSF have the ability to sell commercial properties to the fund.

Trustees of self-managed super funds (SMSF), which give members the ability to own commercial property, are not limited to those who run their own small businesses for a living. In order to get funding for the acquisition of commercial property, a Self-Managed Superannuation Fund (SMSF) may make an application for a loan that is specifically designed to meet the needs of SMSFs. On the other hand, the standards are stricter than those that are for traditional financing, with stricter loan-to-value ratios being one of the requirements.

The majority of people who own small businesses finance the purchase of their commercial real estate with their self-managed super fund (SMSF), and then they pay rent directly to the SMSF. It is essential to get this part right; the rent that is paid must be at the going market rate (no discounts are allowed), and it must be paid on time and in full on each date that it is due.

Additionally, the investment must conform to the overriding goal of the SMSF, which is to give its members retirement benefits when they reach retirement age (this concept is known as the sole purpose test).

It is possible that it might be beneficial for your company to make the purchase of premises using their SMSF. Nevertheless, in order to be in accordance with the requirements, you need to be certain that the acquisition results in a retirement benefit for the trustees.

Take into account the rental income as well as the anticipated increase in property value. If the property isn't in good shape, you might want to rethink your decision.

Is It Possible for an SMSF to purchase a Commercial Property?

Yes. This is the method of purchasing real estate that can be utilized by SMSFs. If you want to acquire a property using your SMSF, you must first ensure that you are in compliance with the ATO's guidelines, which are outlined below.

The property:

  • Must pass the "sole purpose test" and demonstrate that the fund's primary objective is to offer retirement benefits to its participants;
  • Must not be purchased from a member's family, spouse, or other related parties, with the exception of purchases of commercial property.
  • Must not be occupied by any member of the fund or any party affiliated with any member of the fund;
  • Must not be rented by a member of the fund or any party affiliated with a fund member in any way.

However, your SMSF has the ability to buy commercial property, such as the location of your own firm. The fact that you are able to make rent payments directly to your SMSF at the going market rate makes this an appealing choice for trustees of SMSFs. Instead of paying rent to a landlord or a third party who provides no financial benefit, many SMSFs have made the decision to do this since it will assist them in growing their SMSF fund in preparation for their retirement.

It is generally recommended that a fund does not put all of its money into a single asset. Even after the funds have been utilized to purchase the home, there ought to be sufficient capital in the superannuation fund for further investment. Borrowing money to invest is yet another choice, although it is important to keep in mind that this choice does not represent a low-cost alternative. When a self-managed super fund (SMSF) borrows money to acquire property, the loan that must be used will typically have interest rates and required deposits that are significantly higher than those associated with personal borrowing.

Using a self-managed super fund, you are able to make investments in real estate (SMSF). Indirect property investments can be made through listed property trusts or as part of a broadly diversified portfolio that invests in certain categories of property, such as infrastructure or commercial property. Direct property investments can also be made through individual real estate transactions.

Direct investments in residential and commercial real estate are open to SMSFs as investment options.

An SMSF may acquire commercial or residential real estate for investment purposes. If you are the trustee of your self-managed superannuation fund (SMSF) or a director of the corporate trustee of your SMSF, you have more say over the property or properties in which your fund invests. You are the one who decides which property to purchase, how much rent to charge, and when the property should be sold.

You need to have a solid understanding of superannuation law as well as any other pertinent legislation in this region before you can proceed with the purchase of the property using your SMSF. It is essential that the trust deed for the SMSF should allow you to purchase property, and your fund's investment strategy should include the purchase of the property. There are also limitations placed on who can sell the property to you and who can be your tenant if you rent it out.

We strongly suggest that you discuss the possibility of using your retirement savings to purchase a home with a qualified financial professional before making any final decisions.

One of the primary advantages of having a Self-Managed Superannuation Fund (SMSF) is that it enables you to take out a loan from your fund in order to buy the commercial property that will be used by your business, thereby making you your own landlord. This is beneficial to a large number of small businesses and professional firms.

It is possible to use your retirement savings or superannuation to buy an investment property, regardless of whether the property will be used for residential or commercial purposes. In order to accomplish this goal, the first thing that you will need to do is establish a Self-Managed Super Fund, often known as an SMSF. This is the only method that will enable you to make use of your retirement savings in order to buy an investment property. There are a variety of additional kinds of retirement savings accounts available, such as retail super funds, industry funds, and super corporate funds. However, none of these will allow you to buy a house for the purpose of making a profit, so let's not worry about those options. With a self-managed super fund, also known as an SMSF, you have access to a larger variety of investment options than with other super funds; nevertheless, there are very specific guidelines to follow when it comes to investing in real estate. For example, you cannot use the money from your SMSF to buy a residential investment property from yourself, for another member of the fund, or for a relative of one of the members. Additionally, fund members or their families are not permitted to rent out the property, and it is required that the property be rented out at the going market rent rate.

"What is the going rate for rent?" We have heard your question. The term "market rent" refers to the amount of money that a willing tenant can reasonably expect to pay for a tenancy and that a willing landlord can fairly expect to get in return for renting out their property. It ought to be comparable to the rent that is charged for comparable residences located in comparable neighbourhoods. If you charge much more than this sum, prospective renters have the right to file an appeal with the tenancy tribunal requesting that the rent be lowered.

How To Use Superannuation To Buy An Investment Property

In order to start a self-managed super fund (SMSF), you need to make sure that you have enough money saved up to make the acquisition of an investment property through your SMSF a financially viable choice. Because there are ongoing costs connected with managing your own superannuation, which the ATO has generously highlighted for us here, you need to make sure that you take these costs into consideration when you are conducting your initial research. You should take the time to examine the level of fees you are paying on your current super to the continuous cost that is connected with administering the SMSF, even though there is no legally mandated minimum balance that must be present in order to establish a self-managed super fund (SMSF). The bare minimum fund balance that you would require, according to the popular consensus, is approximately $200,000. This enables for enough to pay the costs of not only the property but also any charges related to SMSF, as indicated by the ATO above. This amount rises to $500,000 if you intend to use an SMSF administration business to assist with the administration and compliance responsibilities. This is due to the fact that the costs charged by these companies are greater than average.

What Are The Potential Tax Benefits Of Owning Property Inside My Superannuation?

The rental income generated from investment properties is subject to a tax rate of fifteen percent within the context of superannuation. This rate is also applicable for the Capital Gains Tax during the first year of ownership. Following the first year, the rate decreases to ten percent, and there is no requirement to pay capital gains tax when selling a property while in the pension period.

What are the guidelines for purchasing a business property from a family member or other close relative?

Using your SMSF to make a real estate purchase is subject to a number of very particular regulations that have been outlined by the ATO. The regulations for purchasing residential real estate through an SMSF are different than those for purchasing commercial or business property.

It is possible for a self-managed super fund (SMSF) to invest in "business real property," which can refer to commercial or industrial property, as well as offices, warehouses, stores, or even a farm. Residential real estate is another type of investment that is acceptable. However, in terms of investments in superannuation, the most important distinction is that, in contrast to residential property, an SMSF can buy real business property from related parties or fund members. Furthermore, fund members or related parties (relatives of fund members) are able to use an SMSF asset if they so choose.

The Financial Implications of Purchasing and Leasing Out the Property

If you use a self-managed superannuation fund (SMSF) to buy a piece of real estate, the fund will be required to pay a tax rate of 15% on any rental income that is produced by the property. The fund is eligible for a discount of one-third on any capital gain that it generates upon the sale of properties that it has held for more than a year, bringing the fund's total potential tax payment on capital gains down to 10%. This discount applies to any capital gain that the fund generates upon the sale of properties that it has held for more than a year.

If the fund acquires the property with the help of a loan, it may be able to take a tax deduction for the interest payments that are made on the loan. You will have a loss that is subject to taxation if your expenditures exceed your income. This loss will be carried over from year to year, and it can be deducted from any taxable income that may be earned in the future.

If and when the trustees reach the age at which they are eligible to receive a pension from the fund, the fund will no longer be required to pay taxes on any rental income or capital gains that may accrue.

You should also be aware that if you suffer a loss on your property, you won't be able to deduct that loss from your personal taxable income if it comes from sources other than the fund. This is something you should be aware of before purchasing the property.

Using Loans to Acquire Real Estate for Your SMSF

A limited recourse borrowing arrangement is used when financing the purchase of real estate through a self-managed superannuation fund (SMSF) (LRBA).

A separate property trust and trustee are established to hold the property on behalf of the super fund, which is held outside of the real SMSF structure. This is done to "limit the recourse" of the lender, which means to "restrict" the lender's ability to take legal action against the borrower. The bank account of the retirement fund is used for handling all of the property's financial transactions, including both revenue and expenses. The retirement fund is responsible for making all necessary loan repayments. If the super fund does to comply with this requirement, the lender's sole available recourse is the property that is held in the separate trust; they are unable to access any of the super fund's other assets.

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

SMSF Borrowing Requirements and Criteria

The criteria for borrowing money for an SMSF are typically quite a bit more stringent than those for a standard property loan that you may take out as an individual. When determining whether or not the investment will be profitable, it is necessary to take into account the additional costs that are associated with the loan.

At this time, the common view is that the vast majority of financial institutions will not contemplate lending to an SMSF unless the SMSF has a balance of at least two hundred thousand dollars.

Before you even establish the super fund, it is strongly recommended that you consult with a bank or mortgage broker to determine if you have sufficient funds to obtain financing if the primary reason you want to have an SMSF is to purchase property with a mortgage. If this is the case, having an SMSF will allow you to purchase property with a mortgage.

Keep in mind that your self-managed super fund (SMSF) must be used to make loan repayments. This indicates that your SMSF must always have cash available to satisfy the loan repayments in order to avoid defaulting on the loan. The self-managed super fund (SMSF) may be able to cover the cost of the loan repayments using either the income from the property's rental or the superannuation contributions that have been paid into the fund.

Scroll to Top