Investing in property is a popular choice in Australia because it’s often seen as easier to understand and less risky compared to other types of investments. At the same time, superannuation is a savings tool designed to help people maintain their lifestyle after retirement. Since 2007, Australians have been allowed to use their superannuation to invest in property, creating a growing interest in property investments within super funds.
Self-Managed Super Fund (SMSF)
Not all superannuation funds can buy property. To invest in property using super, you need a Self-Managed Super Fund (SMSF). An SMSF works similarly to other super funds: it receives contributions, invests those contributions, and you can access the money once you meet certain conditions (usually retirement). The main benefits of an SMSF include more control and flexibility over your investments, especially when it comes to buying direct property.
An SMSF allows up to six members, which means you can pool your super with family members, like your partner or children, to invest together.
Superannuation Rules
Investing in property through your SMSF isn’t as simple as buying property outside of super. The property you buy must meet certain superannuation laws, such as the ‘sole purpose’ test. This means the property must be purchased solely to grow your super balance. You can’t buy a property for personal use, like a home for your kids or a holiday house.
The only exception is commercial property. If you want to rent out a commercial property owned by your SMSF, you can do so as long as you pay market rent.
Bare Trust
If you plan to borrow money to buy a property through your SMSF, you’ll need to set up a special trust called a Bare Trust (or Custodian Trust). This trust holds the property while your SMSF maintains control. The Bare Trust is necessary because super funds cannot borrow directly under current laws.
Borrowing to Buy Property
If your SMSF needs a loan to buy a property, it must be a special type of loan called a Limited Recourse Borrowing Arrangement (LRBA). With an LRBA, your SMSF’s liability is limited to the property purchased with the loan. If your SMSF defaults on the loan, the lender can only take the property, not other assets in the fund.
However, banks may still require you to give a personal guarantee on the loan. This means that if your SMSF can’t repay the loan, the bank could ask you personally to cover the difference.
How to Buy Property with Superannuation
Here are the steps to buying property with your super:
- Set up an SMSF.
- Open a bank account for your SMSF and transfer your existing super into the account. Be mindful of any insurance attached to your current super, as it may be cancelled when you transfer.
- Set a budget for your property purchase. Banks may lend up to 80% of the property’s value, but a more conservative approach would be to aim for a 70% loan.
- Go through the property purchase process, which includes providing your SMSF and Bare Trust documents to the lender and possibly getting advice from a financial adviser.
- After settlement, all expenses and rental income from the property will go through the SMSF bank account.
Benefits of Buying Property through Super
- Use pre-tax super money for the deposit and purchase costs.
- Your employer’s super contributions can help cover property maintenance and loan repayments.
- Rental income is taxed at a lower 15% rate compared to personal tax rates.
- Capital gains tax is reduced to 10% if the property is held for over 12 months and may be eliminated if held until retirement.
- You can pool funds with family members to increase your purchasing power.
Risks of Buying Property through Super
- Lenders have stricter requirements for borrowing within an SMSF.
- The SMSF structure and property investments must comply with multiple legal and tax rules, and these factors can affect one another.
- You can’t use the property for personal purposes.
- You won’t be able to access the funds until retirement.
- The SMSF must be audited every year, which incurs extra costs.
- Borrowing magnifies both potential gains and losses, so if your SMSF can’t make repayments, it may lose the property and make a financial loss.
Conclusion
While using your superannuation to invest in property has many benefits, it’s important to carefully consider all factors before moving forward. If you’re interested in buying property through an SMSF, speaking with a financial adviser can help you understand your options and make the best decision.
General Advice Disclaimer
The information provided in this article is general in nature and does not constitute personal financial advice. Before acting on any information, you should consider the appropriateness of the information provided having regard to your current position.
M&A Wealth
The information in this article has been provided courtesy of the Financial Advice team at M&A Wealth.
If buying a property through Superannuation is of interest to you or you would like to explore further options on how to Build, Manage and Protect your wealth, visit www.mawealth.com.au or give the team a call on 1300 629 325 and they would be more than happy to assist you along your financial journey.