INVESTING IN PROPERTY THROUGH YOUR SUPERANNUATION
The first thing you need to know is the only way to be able to use your super to invest in property is if you have a self managed superannuation fund. So while using your super for property investing is exciting you need to be prepared to go through the process of setting up a self managed super fund and the administration to manage that fund too. Once you have a self managed super fund set up you can then invest in either residential or commercial property.
HOW MUCH MONEY DO YOU NEED IN YOUR SUPER TO SET UP A SELF MANAGED FUND?
Due to the administration required to manage your own find it only becomes worthwhile when you have around $200,000 in super. If you have less than that then you have to ask yourself is it really worth while. If you are super keen you could restructure things to add more money into your super over time to get to this point knowing you can do it then.
The ATO has a helpful page here about fees.
Now you can use a superannuation administration company to handle all this for you. But they say that for this you would need more like around $500,000 in your super for it to be worth your while.
CAN YOU BORROW MONEY TO BUY AN INVESTMENT IN YOUR SELF MANAGED SUPER FUND
You sure can. That’s what makes this so much fun. It’s a bit trickier than a normal bank loan though. For example you need a massive deposit for around 40%. The ATO has a helpful page on borrowing here. You can also connect with a very good Sunshine Coast finance broker, Julie here.
Being able to leverage debt is one of the big advantages of property investing via your self managed super fund.
To limit the “lenders’ recourse,” you’ll need a separate property trust and trustee to hold the property for the SMSF, outside the superfund’s actual structure. All the property’s income and expenditure will be channeled through the super fund’s bank account. The super fund must satisfy all loan repayments. If it fails, the lender has the property held in the separate trust as a way out, and cannot access any of the super fund’s remaining assets.
The requirements for a super fund are usually much tighter than for a typical property loan. The loans also carry more interest, so it’s essential to carefully consider your loan options before choosing to buy property this way.
If your primary goal for establishing an SMSF is to purchase property, then it would be wise to consult with a mortgage broker or bank before you establish the super fund, so you can determine whether you have enough funds to obtain financing.
Loan repayments must be made from your SMSF. This means your SMSF must always have enough funds to make loan repayments. The SMSF may finance loan repayments through rental income or through retirement scheme contributions made to the fund from its members.
ARE SELF MANAGED SUPER FUNDS POPULAR IN AUSTRALIA?
The latest statistics from the Australian taxation office show there were over half a million self-managed super funds in the country in the first quarter of 2020 – a 15% increase from 5 years ago.
While the data is proof that SMSFs are immensely popular if you’re reading this, it’s likely you’re not sure what they are, what they do, or how you can use them to acquire a property.
This guide answers those questions.
WHAT IS A SELF-MANAGED SUPERFUND?
A self-managed super fund (SMSF) is a pension trust scheme designed to give its members benefits once they retire. SMSFs differ from other super funds in the sense that their members are considered trustees as well.
They can have between one and four participants, and they’re favoured over other retirement schemes because they award the trustees a significant amount of control – they can modify the funds to serve their individual needs.
HOW DOES AN SMSF WORK?
SMSFs are expressly created to provide financial reimbursements to members upon retirement or to their beneficiaries if they die. They have unique Tax File Numbers (TFNs), Australian Business Numbers (ABNs) and transactional bank accounts, so they can receive rollovers, contributions, and make investments. They can also issue pensions and lump sums.
All SMSF transactions are conducted in the name of the fund and are managed by the fund’s trustees.
SMSF TRUSTEES
As a trust, an SMSF must have a trustee. There are two options for this:
Individual Trustee: Each member is chosen as a trustee, with a minimum of two trustees needed.
Benefits of having individual trustees
If individuals operate as trustees of your find, then you’ll have minimal administrative difficulties, and there’ll be little upfront costs. Besides this, other benefits include.
- No need for ASIC forms to create the SMSF
- No need for ASIC reporting
- Few procedural directives to follow, because it’s not necessary to comply with company constitutions and hold trustee meetings.
Corporate Trustee: A company operates as the trustee and each member as a director.
Benefits of having corporate trustees
- Asset Separation: With corporate trustees, it’s easier to ensure trust assets remain separate from individual member assets.
- Liability Management: Companies enjoy limited liability. Consequently, if a corporate trustee incurs any liability, the super fund’s individual directors will not suffer personal liability (except for extraordinary circumstances). Conversely, individuals who take on the roles of trustees expose their personal assets if they sustain liabilities as trustees of the fund. If the individual’s right of indemnity against the fund is insufficient to discharge the liability, then the individual remains liable for the shortfall.
- Loans: As a general rule, banks prefer to do business with SMSFs that have corporate trustees.
RESPONSIBILITIES OF AN SMSF TRUSTEE
As a trustee, you must make investment choices and verify the proper implementation of a sound investment strategy for your fund.
Super funds also come with stringent administrative responsibilities that require the maintenance of records, provision of financial statements, and complete tax returns. For this reason, most trustees hire SMSF specialists to help them sort out auditing, accounting, and tax reporting, as well as for investment and financial advice. That said, the trustees maintain sole responsibility or the decisions and operation of their funds.
RULES ON INVESTING IN RESIDENTIAL PROPERTY WITH SMSF
If you purchase a property through a super fund, you, your fellow trustees, and anyone related to you (regardless of how distant the relationship) cannot live in it.
You, your trustees and other people related to you cannot rent the property. To be clear, buying a holiday home with your SMSF and living in it during the summer is not a good idea.
You also can not incorporate an existing residential investment property into an SMSF – either through buying it at market rates or contributing to it within the cap limits.
RULES ON INVESTING IN COMMERCIAL PROPERTIES
Investing in commercial properties through an SMSF has several advantages over residential holdings.
Unlike residential premises, the rules concerning commercial properties in SMSFs permit occupation by the funds’ trustees. They may also be occupied by any relations to the trustees. However, there are several factors to consider before such investments can be made.
Many small business owners use SMSFs to acquire business premises and then pay rent direct to the SMSF. While this is legal, it’s vital to do it the right way. The tenant must pay rent at the market rate (no discounts) and must be paid promptly and in full at each due date.
The investment must also align with the broader goal of the SMSF, which is to provide retirement benefits for its members.
Using your SMSF funds to acquire business premises may seem like a sensible move. However, remember, to adhere to the statutory purpose of your SMSF – ensure your purchase provides retirement benefits to your trustees. Evaluate the profit and expected growth in property value. If in doubt, don’t consult a specialist.
CAN YOU SELF MANAGE YOUR SMSF INVESTMENT PROPERTY?
No you can’t. You need to engage a licensed real estate agency or property manager. Of course if your investment is on the Sunshine Coast Qld, we are very qualified to handle this for you.
WHAT HAPPENS AFTER YOU RENT OR BUY PROPERTIES THROUGH AN SMSF?
If you purchase a property through a self-managed super fund, your fund must pay 15% tax on rental revenue from the property. For premises held longer than a year, the fund receives bout 33% on any capital gain it makes during sales, and this limits tax liability to 10%.
If the property is acquired through a loan, interest payments will be transferred to the fund. If the expenses exceed income, a taxable loss will be forwarded each year, and it can be offset on future taxable income.
Once trustees start receiving pensions at retirement, any capital gains or rental income generated in the fund will be tax-free.
THE RULES OF COMMERCIAL SMSF INVESTMENT
When investing in commercial real estate, super funds may invest all their resources into a commercial facility, if a member of the fund operates an enterprise.
It is a lucrative opportunity for small businesses that want full ownership over the facilities from which they operate. Investors or companies that already own commercial properties may contribute them to the SMSF. It provided that the transaction is subject to contribution caps and that it occurs at market value.
WHAT DOES AN SMSF PROPERTY COST?
SMSF property sales may incorporate several charges and fees. While they appear small individually, their cumulative cost may greatly reduce your balance.
SMSF property transactions may include the following charges:
- Legal fees
- Advisory fees
- Upfront fees
- Bank fees
- Stamp duty
- Ongoing property management fees
It’s crucial that you get accurate, independent advice before you commit to a purchase. So you should avoid groups of advisers who recommend each other’s services. Furthermore, to verify your advisor’s credibility, you should check that they have a license from the Australian Financial Services.
EXTENDED COMPLIANCE
Your super fund must periodically value its assets, and the valuation process must be based on verifiable and objective data. If an SMSF holds commercial property, you’ll need a registered valuer or real estate agent to provide objective, independent valuation.
LIABILITY FOR COMPLIANCE
Buying property through an SMSF will subject you to strict rules and regulations you may not have experienced before as they don’t exist outside superfunds. Trustees often break these rules, as most remain blissfully unaware of their existence until their funds are audited.
It is your sole responsibility as a trustee to familiarize yourself with what is and isn’t legal. Because the Australian taxation office will hold you liable for any misconduct.
There can be severe repercussions for malpractice, so, even if you hire a third party for counsel. It is vital to choose the most qualified and experienced specialists, so you make the best decisions regarding the management of your retirement savings.
REPAIRS AND RENOVATIONS
Minor repairs and maintenance works may be financed from borrowed finances. However, if you intend to do major renovations or improvements to the property, the project must be funded by available cash within the super fund, not a loan or some form of borrowed money.
For best results, it’s wise that you do lots of research before you choose a property to add to your SMSF.
Don’t let yourself be forced into making purchase decisions before you’re ready. Avoid dubious offers like free meals and flights because they might leave you vulnerable to coercion.
Furthermore, like any significant financial decision, you should seek financial counsel from an accredited financial planner before opening a self-managed super fund or using one to purchase a property.
IN CONCLUSION
Yes this is a great idea. If you don’t have enough money in your super yet, start to plan towards that. Keep in mind I am a real estate agent on the Sunshine Coast Qld, I’m not a financial expert. You need to speak with your accountant and speak to the team and Sunshine Coast SMSF Solutions too. You will also find the government smart money site helpful too.
