So you are thinking about a property in a SMSF as you cannot afford one personally or you have invested successfully outside super and you want to duplicate this strategy. Most people setting up SMSF’s are doing so for these key reasons
Buying a property in a SMSF is similar to buying property with a few differences. You will need to have enough to fund purchase costs, you will need to be able to service a smsf loan or limited recourse borrowing arrangement (LRBA) and you will need some structures in place to purchase the property and borrow fund to complete the property purchase
The first step is to determine what you can borrow so you know your maximum property purchase price. If you are setting up a SMSF to buy a property, this is a prudent first step.
You will need to have
You will need the following structures in place in order to borrow to purchase a property in an SMSF.
Now you don’t need to follow all of these steps in this order, but we suggest that if buying a property in a smsf is your goal, then step one is the best option, before you part with money to setup an smsf, You might need to get advice on your responsibilities the property strategy and estate matters, or you can use this information to calculate purchase costs so you are ready to start your smsf property journey. The example below provides more clarity.
EG: New SMSF Property Purchase – Queensland
To purchase this property and to setup a SMSF you will need to have:
SMSF PROPERTY DIAGRAM
Most lenders will lend seventy (70%) of the property value and a stress test interest of 3% on top of the lenders interest rate of EG:5.40% will mean servicing interest is calculated at 8.4% on a principal and interest basis. Add to this a reserve or liquidity test or a diversity test of ten (10%) of property value or SMSF balance or invested in other assets and this covers what most lenders require to fund a property in super purchase. There are exceptions and other conditions but these are the key requirements.
WATCH THE SMSF BORROWING VIDEO
|Tax rate||Deposit/ Stamp Duty||CGT||Loan Repayment||Rental income (Taxed at)|
|Personal||30% – 45%||personal savings||30% – 46.5%||30 years||38.5%|
|SMSF||10% – 15%||use funds in super||15% before age 55, 0% after 55||*15 years||0% – 15%|
All properties purchased in a SMSF must be a single title, single contract purchase. There are some exceptions, but this is very important so you remain compliant with the super laws ( SIS Act)
So buying property in a SMSF comes with more complexity, but the trade off is greater levels of protection, less tax and greater benefits. When you combine mandated employer contributions funding your property along with property rental income in the lowest tax structure you get, arguably the best vehicle to purchase property for wealth creation purposes.
With foreign investors and more seasoned property investors buying most of the blue chip propertyaround the eastern seaboard, an SMSF gives families and groups an opportunity to get into the property market and purchase and repay property in less time than it takes when buying a property outside of super. Of course SMSF are not for everyone, many Australians are better off in retail and industry funds where they can gain exposure to property via a managed fund or reit. Conduct research on your SMSF and property purchases and speak to friends and collegues who will give you an idea of whats involved.
The ATO has some great explainer videos on SMSF’s, property and your annual obligations.
The Money Smart website has good calculators and articles to assist.
Finally, where in doubt, seek advice or engage a smsf specialist provider, who can assist you with your needs