Investing your SMSF in property can be a rewarding experience, with a number of benefits for those who follow the rules. However, there are traps to avoid, with the authorities cracking down on rule breakers.
SMSFs are generally prohibited from borrowing money. However, under an exemption for “limited resource” borrowing it is possible to borrow to invest in a property if the following conditions are met:
- Borrowing must be for a ‘single acquirable asset’ such as a single property, and not one held under several titles, such as a commercial building and land;
- The asset must be held in trust for duration of the loan and only the asset bought can be used as security;
- The fund’s trust deed must allow for investing in direct property, as well as being within the parameters of the fund’s investment strategy.
Benefits of using your fund
Property is generally considered a long-term investment and as such, is perfectly suited to the long-term nature of SMSF investments. Using a SMSF with a number of members’ funds increases the amount of money available for investing, while having a ‘bricks and mortar’ asset allows for direct control rather than buying shares, for example.
SMSFs also provide asset protection since no claim against the super fund trustee can result in a claim on other fund assets. Should the fund default, the value of the acquirable asset, such as the property, is the maximum amount available for creditors.
For business owners, it is possible to buy your business premises and lease the property back from the fund. Unlike residential property investments, the fund can rent or lease the property back to a business run by fund members or a relative, although it must be acquired at market value.
Tax concessions are another attraction, with a maximum tax rate paid by the SMSF on rental income only 15 per cent. Future capital gains are concessionally taxed at only 10 per cent after one year and zero in pension phase.
A DIY fund can also be a co-investor in property with a member, in which case the fund and member own the property directly as tenants in common with any rent being paid to the trustee.
Traps of investing your SMSFs
Due to the single acquirable asset rule, any major change to the asset, such as putting a building on a vacant block of land, will make it ineligible as a single loan cannot fund two assets.
There are also regulations concerning making improvements, with funds allowed to borrow for maintenance and repair but not improvements that substantially increase value.
Funds are now allowed to finance improvements with other fund resources and not borrowings, but the fundamental character of the property must be retained.
Should the property suffer major damage such as from fire or flood, rebuilding the property with new materials is acceptable, provided it is funded for separately. Yet should the fund wish to convert a damaged house into an apartment complex, the loan would have to be immediately repaid.
Insurance is another issue, so trustees should have appropriate public liability insurance in the event of an on-site accident or death at the property.
Negative gearing is not as attractive for SMSFs due to the limited 15 per cent tax deduction for losses, compared to owning a property as an individual.
And remember to treat the property acquisition like any other, by doing normal building checks and ensuring it is a sound long-term investment.
Finally, SMSF-owned properties cannot be used for private purposes, so forget about using it as a holiday home.
- Can you finance the loan repayments, particularly if contribution caps continue to fall?
- What happens in the event of the death or incapacity of a fund member?
- Does the property meet the definition of a single acquirable asset?
- Who is the property being purchased from? Only business property can be purchased from a related party and not residential property.
- Is the property being held wholly and exclusively for business purposes? Who is it being rented to?
- Further considerations if setting up an SMSF
Taxation considerations and SMSF investment rules are general and based on present taxation laws, rulings and their interpretation as atthe date of this article. You should seek independent professional tax advice before making any decision based on this information.