Did you know you can use your SMSF to purchase an investment property? If you own a small business and have an SMSF, this might be the right investment strategy for you. Our Wealth Management experts have prepared a how-to guide to help you get started.

About Self-Managed Super Funds (SMSFs)

A Self-Managed Super Fund (SMSF) is a super fund managed by you and allows you to take control of your fund’s investment strategy and invest in assets you would otherwise not be able to invest in. When setting up your SMSF, you’ll need to:

  • Choose your fund members and trustees
  • Establish the trust and trust deed
  • Set up a bank account
  • Register with the ATO
  • Develop your investment strategy
  • Create a plan for when your SMSF ends. 1

Investment property and superannuation rules

Using your SMSF to buy property is a complicated and confusing process. If you’re wondering whether this is the right investment strategy for you, speak with a financial advisor. Everyone’s circumstances are different, and they’ll be able to guide you in the right direction.

The first step when purchasing a commercial property using your super is to have an SMSF set up. You cannot buy property using a standardised superannuation fund such as industry or retail super funds.

Using your SMSF, you can purchase both commercial and residential property but since SMSFs are designed for investments, you cannot live in this property. You’ll also have to keep in mind the sole purpose test.

What are the benefits of purchasing property through your SMSF?

Residential vs Commercial property

Investing in commercial property over residential property has its benefits. Unlike residential properties, commercial properties can be sold to an SMSF by its members. It can also be leased to SMSF trustees or an individual or business related to them. 3

Tax benefits

One of the major benefits of using your super to invest in property is tax advantages. Superannuation income tax is capped at 15 per cent while you’re still working and at a rate as low as 0% when you’ve reached the retirement age. Capital gains tax is most likely capped at ten per cent while you are working and 0% when retired. In addition, if there is a borrowing arrangement the interest that the loan accrues is tax-deductible for your SMSF. 4

Pay yourself rent

If you move your business into the commercial property you’ve purchased, you essentially become your own landlord. SMSFs have the option of investing a considerable amount into commercial premises if a member of the fund runs a business. Instead of paying off someone else’s investment, you’re paying off your own assets. 4 Keep in mind that buying and transferring property may have capital gains, stamp duty and tax implications, so always get advice from a financial planning expert before making a decision.

Increase your retirement income

This type of investment will strengthen your retirement income. Your SMSF gains all the income and capital gains from the property investment and if there’s no loan on the property, you can use rental income to fund your pension account. The investment income might be tax-exempt and is called Exempt Current Pension Income (ECPI). 5

How to own commercial property in your SMSF

You’ll find that there are a few ways to own commercial property in your SMSF, but we’ve focused on two.

Outright purchase

Arguably the easiest way to purchase an investment property, and if you’re in the position to do so, is to pay outright. The advantages of owning outright are that you can make modifications to the property, you’ll be debt-free and not subject to interest rate rises, and those capital gains will be yours, making the property a key part of your investment strategy.

Limited Recourse Borrowing Arrangement (LRBA)

Borrowing in your super to purchase property must be done under strict borrowing conditions called a Limited Recourse Borrowing Arrangement (LRBA). This is when an SMSF trustee takes out a loan from a third-party lender (like a bank) and uses the money to buy assets in a separate trust.

Under LBRA, if the borrower can’t repay the loan, the lender can typically only use assets in the separate trust to repay the debt. They usually cannot go after personal assets like a car, personal savings, or homes. 5

There can be tax benefits when setting up an LBRA, but it may not be the best option if you’re only borrowing small amounts of money. Talk with a financial advisor early on so they can brief you on your investment responsibilities and compliance requirements and can suggest alternatives if this is not the right choice for you.

SMSF property costs

Investing in property through your SMSF is a complicated process and there are costs involved that will add up and reduce your super balance. Costs can include:

  • Upfront fees
  • Legal fees
  • Advice fees
  • Stamp duty
  • Ongoing property management fees
  • Bank fees 6

Why you should speak to a financial planner

It’s important you understand the responsibilities that come with not only being an SMSF trustee but also the specific requirements around the property through your SMSF. Compliance and regulations are always changing so it’s important to do things right. By speaking with a financial planner, you’re ensuring you’re getting the highest level of technical expertise and are staying on top of all your ATO obligations.

A financial planner will also help you decide whether this is the right investment strategy for you. Buying property through your SMSF is not an easy task and there are many things to consider before making such a decision, like the financial health of your business.

How Carbon can help

Purchasing a property through an SMSF involves coordination across multiple different divisions which all are involved in this process. This includes your accountant, from a tax planning perspective, your mortgage broker from a debt structure perspective and your financial planner from a personal wealth perspective. Carbon can create, implement and manage a strategy that considers all three and maximises your long-term benefits. Get in touch with our Wealth Management team today to get started on your investment journey.

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DISCLAIMER

Carbon Group Wealth Pty Ltd ABN 27 651 743 734, CAR  001292171 is authorised to provide financial advice through Insight Investment Services Pty Ltd ABN  22 122 230 835  AFSL 309996 This website and any documents contain general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making an investment decision. Please read our current Financial Services Guide (FSG) which can be found here. Please also read our current Privacy Policy which can be found here.

 

SOURCES
  1. Self-managed super funds, Australian Taxation Office
  2. How to buy a commercial property and lease it through your SMSF, SuperGuide
  3. The implications of purchasing a commercial property or an overseas property through your SMSF, SMSF Adviser
  4. A 2022 guide for acquiring commercial property through your self-managed super fund, BlueRock
  5. Using super to buy property, Properties & Pathways
  6. SMSFs and property, Moneysmart