Should You Invest in Property Through SMSF?
Australians love investing in property because this is a key driver for their personal wealth. SMSF property investment has become popular with people who want to increase their wealth and diversify their investment portfolio.
Investing in property is, however, risky. Property values rise quickly and can also fall quickly. But investments in properties through an SMSF may be good for people who have long-term investment goals.
Like any other investment options, there are advantages and disadvantages. There are also risks involved that should be considered before buying properties or before investing through your SMSF.
Tax concessions and SMSF property investment income.
The advantages of investing in property using your SMSF come from tax concessions. There is a 15% tax rate on an SMSF property investment compared to high costs of personal taxes.
Property investments open ways to potential sources of revenue that can drive growth for your retirement funds. Making or getting income from an SMSF property investment can be used to fund other investment purchases and utilise tax breaks for properties that are negatively geared. Rental income paid to your SMSF is taxed only at 15% and can even be decreased or reduced to 0% in some situations.
Even if properties are subject to high purchase or sales taxes, like stamp duty and capital gains tax, if they are held long-term, they can yield higher returns which are not generally found with other investments.
Even if there are clear benefits to SMSF property investments, there are also things that you need to be aware of and regulations that you must adhere to.
Restrictions on how you use your property. Like other superannuation investments, SMSF properties cannot be used to purchase or pay off a home or holiday home. These investments must be used to save for your retirement. An SMSF property investment cannot be used by the SMSF trustees or their relatives. They are not allowed to occupy the property. SMSFs cannot purchase properties that you, a friend or relative already owns.
Commercial properties, however, can be bought and used by an SMSF trustee or their family members as long as they pay rent or buy them at their market rate.
Ensure that your assets are diversified.
It is important to make sure that you have diversified assets in your super fund. You have to make sure of this before investing in property. It is not advisable to have your SMSF into one investment. A diverse investment portfolio will prevent your investment strategy from being considered as too risky and it will help shield you from losses or market volatility.
Be ready for the complexity of SMSF loans. SMSFs are only allowed to use a limited alternative loan to purchase an investment property. If a fund defaults on the loan, the fund’s assets are not at risk. It is, however, harder to get a loan use as an SMSF property investment. Most lenders will not lend more than 70-80% of the purchase price.
Using the funds of an SMSF to purchase properties can outweigh the borrowing costs. But, depending on your circumstances, and SMSF-bought investment on a property can be a great way to grow your wealth and build a better retirement. It is, however, not right for everyone.
Borrowing through a limited recourse can be made when purchasing a single asset like residential or commercial property. You should assess whether the investment is consistent with the investment strategy and risk profile of the fund.
Risks involved in geared SMSF property.
- SMSF property loans have a tendency to be more costly than other property loans.
- Loan repayment must be made from our SMSF which means that the fund must always have liquidity or cash flow to meet repayments of loans.
- If SMSF property loans are correctly set up, undoing it may not be permitted and you might need to sell the property that can cause losses to the SMSF.
- Tax losses from the property cannot be offset against taxable income outside of the fund.
- Until the SMSF property loan is paid off completely, alterations cannot be made on the property.
Rules on SMSF property investment.
- It must satisfy the sole purpose test which is to provide retirement benefits to fund members.
- The property should not be acquired from a related party of a member or trustee.
- The property must not be lived in by a fund member or any fund members’ related parties.
- It must not be rented or leased by your fellow trustees or any related parties.
Your SMSF, however, could potentially buy your business premises, that allows you to pay rent directly to your SMSF at the market rate.
What are the costs of setting up an SMSF?
SMSF property sales have many charges and fees. Once these fees add up, they will reduce the super balance. It is best to find out more information about the costs of setting up an SMSF including legal fees, upfront fees, advisory fees, stamp duty, bank fees, and ongoing property management fees.
Be aware of fees charged by groups of advisers. Anyone who gives advice regarding SMSFs should have an Australian Financial Services (AFS) license. The ASIC Connect’s Professional Registers will tell you if the company or person giving you advice holds a license.
Property developers should be licensed by the Australian Financial Services to provide financial planning advice. Do not be pressured to make a property purchase and make sure that you are getting financial advice from a licensed financial adviser. In addition, only hire an approved SMSF auditor to make sure that your SMSF property investment as well as your strategy and income are documented and within the rules and regulations set forth by ATO.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.