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Using SMSFs to buy property has become increasingly popular among Australians in recent years, particularly since it became possible for SMSFs to borrow money to fund a direct property purchase.
A residential property owned by an SMSF has some limitations as to who it can be leased to.
To buy property through your SMSF, the property must meet the following requirements:
- It meets the ‘sole purpose test’ of solely providing retirement benefits to members of the fund.
- It is not acquired from a related party of a fund member.
- It is not to be lived in or rented by a fund member or a party related to a fund member.
A commercial property owned by an SMSF can be leased to a wider range of tenants than residential properties. Commercial property purchased for business purposes can be purchased from a member of the SMSF or a related entity. This allows small business owners to use their SMSF to purchase the premises from which their own business is run, enabling them to pay rent directly to their fund. This can be preferable to paying rent to an alternate landlord. However, keep in mind that rent must be at market rate and be paid promptly and in full at each due date.
SMSFs can borrow money to purchase a property, however, the borrowing criteria for an SMSF is generally much stricter than regular property loans taken out by individuals. All loans must be undertaken through a limited recourse borrowing arrangement (LRBA). An LRBA involves an SMSF trustee taking out a loan to purchase a single asset, such as a residential or commercial property. Under the Superannuation Industry (Supervision) Act 1993, super fund trustees can use borrowed money to pay for regular repairs and maintenance. However, borrowed money under the LRBA cannot be used for property improvements or renovations that result in the acquirable asset becoming a different asset. This may include adding additional rooms to the property or completely renovating a room.
Buying and renting property through an SMSF also comes with tax consequences. SMSF funds are required to pay 15% tax on rental income from properties purchased through the fund. However, properties held for over 12 months receive a one third discount on any capital gains made upon the sale, bringing any CGT liability down to 10%.
Expenses such as interest from loans, council rates, maintenance and insurance can be claimed as tax deductions by the SMSF.
As well as this, once SMSF members reach pension phase, any rental income or capital gains arising in the fund will be tax-free.
SMSF property costs
SMSF property sales often attract higher fees that can end up reducing your super balance. Fees and charges can include:
- legal fees,
- property management fees,
- bank fees,
- advice fees, and
- stamp duty.