So you are thinking about a property in an 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
- Desire more control and choice
- Direct ownership of assets
- Deductible operating costs, insurance costs and interest and depreciation deductions on properties
Buying a property in an SMSF is similar to buying a property outside super, with a few differences. You will need to have enough to fund purchase costs, you will need to be able to service an SMSF loan or limited recourse borrowing arrangement (LRBA) and you will need some structures in place to purchase the property and to allow you to borrow funds, 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
- SMSF Savings $150,000 between 1-4 people
- Receive or make super contributions
- Be willing to take on more responsibility to gain more control and choice
You will need the following structures in place in order to borrow to purchase a property in an SMSF.
- SMSF Trustee Company / SMSF Trust
- Property Trustee Company / Property (Bare) Trust
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
- Property Value $400,000
- Rental income is 5.5% or $22,000 p/a
- Super contributions: couple’s total income $150,000 = $14,250 (9.5% SG)
- Deposit 30% $120,000
- Stamp Duty $13,501
- Legal/Loan/Bare Trust cost $4,500
- Liquidity test 10% of property value left in SMSF $40,000
- Stress test of 2.5% – 3% interest loading on headline rate
To purchase this property and to setup a SMSF you will need to have:
- You will need to have at least $180,000 saved in super between 1-4 people
- Receive or make super contributions
- Rental returns of 3% +
- Willing to take on more responsibility for the operation of the fund
SMSF PROPERTY DIAGRAM
SMSF LOANS ( LRBA’S )
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.
WHAT ARE THE RISKS?
- The strategy is not completed properly, resulting in a compliance breach which is noticed byyour auditor
- Double stamp duty, due to incorrect structure and advice
- Longer time taken with lending and settling property due to lack of understanding of the SMSF Lending process
- Property based risk – delayed build and settlement, untenanted property, higher management costs compared to ETF’s, shares and managed funds
WATCH THE SMSF BORROWING VIDEO
THE BENEFITS OF OWNING PROPERTY IN A SMSF
|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%|
WHAT KIND OF PROPERTIES CAN I BUY?
- Existing Properties
- Off the plan
- House and Land
- Commercial Properties
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
WHAT YOU CANNOT BUY IN A SMSF
- A property you already own
- A property owned by a relative
- You cannot provide accommodation or housing for your family members or your relatives in a property you purchase
- A Holiday house that you intend on using occasionally
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 property around 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 colleagues 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