Grow Your Self-Managed Super Fund (SMSF) With Property Purchasing

Traditionally, SMSFs grow their funds through a variety of investment strategies like shares, term deposits, managed investment schemes, derivatives, collectibles and more. Investing in property was a less popular choice due to the large amount of funds required to purchase one. Since 2007 however, superannuation laws in Australia have allowed SMSFs to borrow money to invest in property, making property investment yet another viable option for growing a SMSF.

If you’re looking to grow your SMSF, here’s why you should consider purchasing property:

  • Possibility of generating high returns, thus maximising your retirement income.
  • Minimum taxation on the rental income that the SMSF property earns.
  • Not affecting your personal savings since the cost of purchasing the property and maintaining it are borne out of the SMSF.
  • Interest paid on loans, insurance, maintenance and other expenses related to the property are eligible for tax deduction. This will considerably bring down the tax you owe on your SMSF earnings each year.
  • Availing a discount on the capital gains tax if you happen to sell the property before your retirement, and if the property is sold when in retirement, no capital gains tax is applied.

Residential, commercial and industrial property can be purchased through a SMSF however must pass the ‘sole purpose’ test – meaning the property should have been bought solely for providing retirement income to the SMSF members. Purchase of the property should not directly benefit the trustees or people related to them in any way so trustees cannot live in nor rent the property to fund members or any other person related. The only exception to this is a SMSF member can purchase a property that their business operates out of and pays rent to the SMSF at current market rates.

What if your SMSF does not have sufficient funds to buy property?

You can use a Limited Recourse Borrowing Arrangement (LRBA) to fund the purchase. A LRBA is a type of loan where a SMSF trustee takes a loan from a third party lender to fund purchase of a single asset. The asset, in this case the property, will be held in a separate trust from your other SMSF investments. In case of loan default, the lender can only use the property purchased via the loan and any other security offered against the loan to recover the loan value. The other SMSF assets and investments will not be at risk.

Ideally, SMSFs should have a sizeable fund value before investing in property. While this is a good investment option, you may still want to have a diversified portfolio so as to minimise your risks. Also, consult professional help if you have decided to invest in property to ensure you are not putting your SMSF at any unnecessary risks. Remember that any non-compliance can invite a high penalty, leading to substantial loss of your fund money.

When done right, property investment can be a great way to maximise your retirement benefits. If you are considering making a property investment through your SMSF and want to know the dos and don’ts regarding property investment in SMSFs so that you are never at risk of being non-compliant, let us know and we’ll be more than happy to guide you through.

Looking To Retire With An SMSF? What You Should Know Before Moving Into One

A Self-Managed Super Fund (SMSF) is a legal tax structure regulated by the Australian Taxation Office (ATO) that allows people to control and manage their retirement savings. Individuals are responsible for managing the fund and investing it appropriately while ensuring compliance to tax laws and super fund regulations. The increase in popularity of SMSFs came after the 2006 announcement of tax-free super for senior citizens, and today, there are nearly 600,000 registered SMSFs in the country.

An individual SMSF requires one to four members who are all trustees. If you’re deciding on whether SMSFs may be the right choice for you, consider the following features and benefits:

  • Control and flexibility – This is one of the best features of running and managing SMSFs as it gives you control over your fund’s investments, and flexibility to invest in a variety of assets such as direct property, shares, term deposits, and collectibles. You also have the flexibility to switch or modify investments when needed.
  • Concessional tax rates – While investment income tax is capped at 15% during the accumulation phase, the pension phase has no tax payable at all, even for capital gains. Well thought out tax strategies will, in fact, help cut tax payments and grow super savings.
  • Capped costs of running an SMSF – This means your costs would not go up as the super balance grows. Your account balance would increase over the years but your costs will remain the same, making SMSFs a cost effective fund to manage.
  • Continuity of fund – It’s also important to note that the fund can continue at the event of the death of a trustee/member. His/her spouse and children can benefit from the fund.

Before making your decision to move into one however, consider also these other points:

  • The sole purpose of an SMSF should be to invest money to provide a substantial retirement income for its members. Investors must note that even though an SMSF gives you access to your super, it is illegal to use the money for any purpose other than investing it in an appropriate channel.
  • As with anything, you reap the rewards of your efforts so you must be prepared to commit some time and effort into managing an SMSF. As mentioned earlier, an SMSF is eligible for tax concessions; but in order to avail these concessions, the SMSF needs to be set up correctly, which would take time.
  • When the SMSF is up and running, you may want to consult an accountant periodically to ensure all records are in order, to review the performance of your SMSF, and seek guidance on tax minimisation.

Given the above considerations, many might then question whether it would be advisable to engage professional help in setting up and managing the SMSF. As is the case with any complicated super fund, it would make a lot of sense to consult and take help from experts to set up and manage an SMSF as well. This is because the entire process from decision making about choice of investments, the actual setting up and managing, and even being aware of the rules and legalities along the way can seem overwhelming to any individual investor.

With professional help such as our SMSF specialists at Superior Accounting Group, you can rest easy knowing that someone will be there to help you at every step along the way. This way, you enjoy the benefits of an SMSF going into retirement without needing to go through any additional stress and effort.