Buying Property In Australia With SMSF: Things To Know
People use super funds to make the retirement of the beneficiaries better. Self-managed super funds (SMSFs) act for the same purposes. However, the difference with other funds lies in the fact that the members of SMSFs are also the trustees, and therefore are responsible for the financial activities, results, and regulations associated with them.
The SMSFs can also be used to buy real estate – however, according to the existing rule, people can only purchase a property. The rules are complex and particularly strict about borrowing money. You have to comply with the super and tax laws. So, if you are thinking about putting up your SMSF for financial use, you should talk with a skilled and proficient property tax accountant Perth before going forward with the deal.
Buying property with an SMSF
The Australian Taxation Office (ATO) has set some specific rules about buying properties with an SMSF fund, as mentioned below:
- The property must meet the “sole purpose” test of only providing retirement assistance to the fund members.
- Any fund member or other person related to the fund member cannot live on the property.
- No fund member can buy the property from another member nor sell it to another member.
- Any fund member or people related to them cannot rent the property.
- A fund member can use the resources to lease a commercial property in their or related parties’ name – provided that the members use the property only for business purposes. However, the rent of the lease must be equivalent to the market rate. The trustees have to follow other rules also.
When renting a commercial space with an SMSF, the members can pay the rent directly to the fund and enjoy the market rate. This feature is especially beneficial to small business owners.
However, you must check the investment strategy and risk profile of your fund before buying real estate. In addition, SMSF property sales often attract higher charges, which can reduce the super balance. So, you should be aware of any stamp duty, property management expenses, bank fees, legal costs, and other expenses before acquiring a property with the SMSF fund.
Taking a loan during property acquisition with an SMSF
The members of an SMSF can borrow money from the market for buying properties – but they must complete the deal under strict conditions. Property experts call These settings a limited recourse borrowing arrangement or LRBA.
- In an LRBA, an SMSF member can take out a loan while buying a single asset, in this case, the property, and hold it in a separate trust.
- Any returns generated from the investment of the property go to the fund. If the SMSF cannot pay the loan back, no other resources are affected.
The Minimum Balance Factor
In general, the SMSF fund interested in buying a property must have a minimum balance of AUD 120000 in the funds and an annual contribution of AUD 15000. Moreover, most financial houses require the SMSF to deposit at least 30% of the property value as the first payment. It is also common for banks to charge a higher rate of interest.
Borrowing money to invest in a property is high-risk, so it would be better to consult with an SMSF accountant about the borrowing options and LRBA rules before advancing to the official stage.
Risks to consider
As stated earlier, an LRBA limits the lender’s recourse and specifies the super fund for all the loan repayments. Apart from that, there are several dangers and other concerns with a home loan taken out by an SMSF, as mentioned below:
- Higher costs: Credits using SMSF can be costlier than other property loans.
- Compliance expenses: SMSFs need to assess all of their resources at market value and the appraisal required is based on unbiased and verifiable data.
- Difficult to cancel: It is difficult and often impossible to undo the legal conditions of an SMSF property. Suppose any issue with the loan document and contract surfaces; the loan-taker may have to sell the property. So, taking out a loan based on the SMSF can theoretically cause significant losses to the SMSF.
- Probable tax losses: You cannot balance tax losses from the SMSF belongings with dutiable proceeds outside your fund.
- Commercial property tax concerns: You will have to register for GST if you invest in commercial property and your income is more than AUD 75000.
- No alterations to the property: Under the LRBA rules, you can perform routine repairs and maintenance to the property. However, improvements and renovations are not allowed –especially any preservations or upkeep, which makes the property a new asset.
- Concerns about capital gains tax: You will have to ensure that you pay the appropriate capital gains tax before selling the property. Therefore, it is good to consult with a qualified tax accountant or SMSF accountant before buying a property using SMSF funds.
Restrictions for using SMSF for investment property
As per the existing rules, you can use the SMSF funds to invest in a property under certain conditions and regulations. These restrictions are mandatory for any party using SMSF for investment property:
- No-one associated with the SMSF will get a present-day benefit from the fund.
- The SMSF funds will be used only for paying retirement or death benefits to the members or their dependents.
- The property must act only as an investment – meaning anyone related to the SMSF cannot live in or rent the property nor purchase it. According to the ATO, the “related parties” include:
- All affiliates of the fund
- Relations of each member
- Business associates of each member
- Any partner or child of those trade partners
- Any company the member or their acquaintances govern or guide
- Trust the participant or their associates’ control.
- Standard “employer-sponsors” employers or acquaintances of standard employer-sponsors
Getting Up-To-Date Advice
The ATO has reduced the before-tax contribution limit to AUD 25000 while keeping the non-concessional limit at AUD 100000. From 2018, several such changes have taken place, which has increased the complexity of buying a property with SMSF. Therefore, if you want to venture into real estate dealings with SMSF assets, it is better to talk with a skilled and updated property tax accountant Perth before proceeding.
