Self-managed super funds hold a large share of Australia's superannuation savings, and many trustees are interested in buying property through their fund.
SMSFs have long been able to own property. Since 2007 they have also been able to borrow to buy an asset, under strict rules, through a limited recourse borrowing arrangement. That has opened property investment in super to more people.
Buying property shouldn't be the only reason to set up an SMSF, but for people who want more control over their super, it can be one of the options.
Questions to answer first
Before the fund buys property, make sure you have a clear strategy and can answer these questions:
- What are the advantages of an SMSF for you?
- What is an SMSF not right for?
- Do you have the expertise, time and money to run the fund?
- How much can the fund borrow, and can it meet the repayments?
- Most importantly, how much money does the fund need to start?
How much money the fund needs
There is no legal minimum, but a fund's running costs are mostly fixed, so they weigh more on a small balance. Buying property adds costs of its own, such as stamp duty, loan fees and upkeep. The ATO and ASIC's Moneysmart publish guidance on when an SMSF may be cost-effective.
Borrowing
Lenders set their own rules for SMSF loans, and they usually ask the fund to put in a larger share of the price than they would for a personal home loan. The fund must also keep enough cash to meet repayments and its other costs, even if the property is empty for a while.
Tax
While members are building their balance, the fund generally pays 15% tax on rent it receives. If the fund sells a property it has held for more than 12 months, one-third of the capital gain is discounted, so the tax on the gain is generally 10%. When the property supports members' retirement-phase pensions, the tax can be lower. Other rules can apply, for example to members with very large balances, so check the ATO's current rules.
The property rules
The property must be bought for the sole purpose of providing retirement benefits. In general, the fund can't buy a residential property from a member or a relative, and members and their relatives can't live in it or rent it. Business real property, such as a member's business premises, has its own rules.
If you're a trustee thinking about property, talk to your accountant and a licensed financial adviser first.