The use of a Self-Managed Super Fund (SMSF) to purchase property is a concept that has become progressively more popular however there are a lot of questions that people considering this option need to ask. How does the purchase actually work? Can you borrow money to purchase a property through your SMSF? How much do we need to have in our SMSF to purchase a property in our SMSF?
Why Should I Consider a SMSF?
- Control – SMSFs allow you to have the ultimate control of your retirement wealth, the ability to know if funds are earning money and the ability for you to choose the types of investments your money is put into.
- Choice – SMSFs allow a wider investment choice than retail funds including residential and commercial property, shares, art work, collectibles etc.
- Tax Minimisation – SMSFs offer you the ability to have tax-free pension income streams in retirement and possibly access benefits previously beyond reach such as the Commonwealth Seniors Healthcare Card or even some Aged Pension.
- Tax Benefit/Tax Control/Capital Gains Tax Benefits – SMSFs allow the Trustee to manage and control tax through timing and structure.
- Asset Protection – assets held within a SMSF can be better protected from instances of bankruptcy and personal liability.
- Cost Saving – in a SMSF there are no brokerage costs, buy/sell costs and overall the yearly cost of running a SMSF can cost less.
How much money should I have to set up a SMSF?
A lot of experts in SMSF suggest that an amount of $200,000 in funds make a SMSF viable. However there are ways to purchase property in your SMSF if you do not have this amount in superannuation, for example purchasing a property jointly with your SMSF, loaning money to your SMSF to buy larger assets or borrowing from a bank.
Can I borrow money through a SMSF?
Yes – SMSF’s can borrow money from most lending institutions. The asset that is purchased is held on trust in the SMSF. This is known as a Limited Recourse Borrowing Arrangement (LRBA) which also has the added protection that if the loan is defaulted your whole SMSF is not at risk.
What type of real property can I purchase in your SMSF?
The short answer is that any property, either residential or commercial, can be purchased in your SMSF although if it is residential you are not allowed to reside there nor is any member of the SMSF or relative of a member of a SMSF allowed to live or rent the property.
If you own the property that your business is conducted from you are able to sell it to your SMSF and then lease it back through your company. This allows the SMSF to receive rental income that is not included as a contribution and allows you to accumulate more money in your SMSF.
What are the requirements of a commercial lease from your SMSF?
- The terms of the Lease must be commercially competitive.
- Rent payments must be made on time, every time, in full.
- Valuations need to be undertaken regularly to ensure the terms of the Lease are commercially competitive.
- The investment must satisfy the ‘sole purpose’ test, being that its sole purpose is to provide retirement benefit to the fund’s members.
What if I don’t have enough money in Super?
There are alternate options to an LRBA arrangement if you do not have enough money in your SMSF. You can:-
- Increase the number of members in your SMSF (maximum of 4 members) so that instead of 2 member’s superannuation you have 4 member’s superannuation.
- Purchase a property together with your SMSF through borrowing as individuals either against the family home or obtaining a loan and own the property as tenants in common with your SMSF.
- Loan money to your SMSF. This is not counted as a contribution in the relevant financial year.
- Purchase a property with a related entity either a company or a trust that you control and own the property jointly with your SMSF.
Are you interested?
If you have any further questions or want to discuss your options feel free to contact Caitlin Bowman or any of the team at Aubrey Brown using our contact information.
About Caitlin Bowman: Caitlin is committed to providing her clients with accurate and practical advice in an efficient and timely manner. She is already well-respected within the Central Coast business community and is known for being 100% dedicated to ensuring her client’s needs are put first. Contact Caitlin today for assistance with your Commercial Law matter.