Adding value to your SMSF with property

3 min read

Australia’s love of property is well documented, so it’s not surprising the number of people using a self-managed superannuation fund (SMSF) to invest directly in commercial and residential property is growing steadily, with real property investment accounting for over $147bn or approximately 20% of total assets invested in SMSF.1

Alongside this, share market volatility, changes to borrowing rules for property and low interest rates are all adding to the attraction of including property within SMSFs. There are a number of key benefits which may make property a good vehicle for long term investments within your fund. 

Owning property through your SMSF typically involves the fund acquiring a residential or commercial rental property which is leased to unrelated tenants, as fund members or relatives generally can’t rent a residential property from an SMSF because of the in-house assets test. Alternatively, it could involve the fund acquiring a related party’s business premises through which you or another fund member operate a business, and leasing it back to the business at a market rate.

Super funds can borrow to fund investments via a ‘Limited Recourse Borrowing Arrangement’ (LRBA), subject to the fund meeting strict criteria. Deciding to gear within your SMSF is an important decision, and should be made with appropriate consideration for the risk appetite and retirement goals of the fund’s members. Borrowing to invest within your SMSF follows similar fundamental principles as borrowing to invest outside your SMSF.

Benefits of borrowing within an SMSF to invest in property

1. Increased Purchasing Power

Borrowing from within your super may increase your SMSF’s purchasing power. This enables your SMSF to potentially purchase a property worth more than its available cash funds.

2. Loan Repayments

The repayment of the loan can be funded not only from tenant rental payments and other earnings of your superannuation fund, but also from the employer and personal contributions of fund members.

3. Asset Protection

Under a Limited Recourse Borrowing Arrangement, in the event of default other SMSF assets are secure as the lender does not have recourse to any of your SMSF’s assets apart from the purchased property.

4. Tax Concessions

Gearing within superannuation may provide several tax advantages.

  • Rental Income – due to the concessional tax rate that applies to superannuation investment earnings, rent received by your SMSF will be taxed at a maximum rate of 15%.
  • Deductible Expenses – loan interest payments and certain expenses related to the ownership of the property such as land rates and property maintenance may be a deductible expense of your SMSF.
  • Capital Gains Tax – special tax rates also apply to any capital gain made as a result of an increase in a property’s value. As such, depending on when you decide to sell the property, any capital gain your fund makes on the sale of the property will be taxed at 15%, or even be tax free if you are in the pension phase of your fund

Although there may be plenty of benefits to gearing and owning property through your SMSF, there may also be a number of risks that need to be considered. Some of the inherent risks of borrowing within your SMSF include the following.

1. Investment Risk

While borrowing to invest can magnify your returns, it can also magnify your losses if the investment makes a negative return. Members need to be investing in a way that maximises returns, whilst taking into account the risk with each investment.

2. Diversification

Depending on the size of your SMSF, purchasing a single property could have a major impact on diversification within your fund. The concern is that if your property suffers a major drop in value, the value of your entire SMSF balance will suffer a similar drop. It is important to have your SMSF sufficiently diversified to avoid such risks.

3. Cash Flow

It’s important to consider the fund’s capacity to meet current and future expenses, such as insurance premiums, property repairs and maintenance, tax liabilities and loan repayments. Trustees need to ensure that either the fund holds sufficient cash or the members have capacity within their contribution caps to make additional superannuation contributions to meet any shortfall.

4. Property Restrictions

There are restrictions on whether the property can be improved, developed or sub-divided whilst there is a loan attached. Before borrowing to invest into property via your SMSF, it’s important to seek good advice to ensure your investment complies with superannuation legislation and all risks are considered.

5. Moving from accumulation to pension

When you move from accumulating towards retirement to being in retirement and drawing a pension from your SMSF, you need to consider whether holding a property in your SMSF is still appropriate, as cash flow needs will increase as benefits are paid out.  Also, there may be implications to how much can be held in a pension if the SMSF still has a debt owing on the property.

For more information, please call 132 135.

1. As at 30 June 2020, Australian Taxation Office Self-managed super fund statistical report June 2018-19

Things you should know

The information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it.  Any taxation consideration outlined in this presentation are general statements, based on an interpretation of the current tax law, and do not constitute tax advice.  The tax implications of the relevant products mentioned in this presentation can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser. 

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