One can use SMSF to buy Residential or Commercial property.
However, any property held by your SMSF must meet the sole-purpose test of providing retirement benefits to fund members, or a benefit to their dependants if a member dies before retirement.
There is nothing to stop an SMSF from investing in residential property as long as you don’t buy the property from a related party of a member.
For example, you can’t own the family home through your super fund. Nor can you rent a residential property owned by your SMSF to a fund member, or to their related parties. However, you can buy an investment property that you rent to tenants who are not fund members or relatives.
You can also hold commercial property, including your own business premises, through your SMSF.
While the property still needs to meet the sole-purpose test of providing retirement benefits to its members, when dealing with commercial property, an SMSF can generally buy the property and lease it back to a member or a related party of the fund – including the member’s business.
An arm’s length sale price and lease arrangement is especially important when acquiring and/or leasing property to a member or related party of the fund.
What are the benefits for an SMSF?
If you buy a property through an SMSF, the fund will pay a maximum 15 per cent tax on rent it receives from the property. On properties held for longer than 12 months, the fund receives a one third discount on any capital gain it makes upon sale, bringing any capital gains tax liability down to a maximum of 10 per cent.
Once fund members start receiving a pension at retirement – assuming they’ve held the property in the fund for this long – the fund will no longer pay tax on either rental income or capital gains when the property is sold.
Who is it not right for?
Purchasing property through an SMSF is not advisable for people who don’t have a large enough lump sum to allow diversification of their investments. Ideally you would allocate a percentage to other investments such as shares and/or term deposits.
And, borrowing through an SMSF may not be a good idea for low-income earners who are really going to stretch themselves in terms of cash flow.
How much can be borrowed?
Banks will generally allow SMSFs to borrow around 70-80 per cent of the property value, however it is more desirable to have at least a 50 per cent deposit so the property is positively geared or close to it.
Tax-deductible personal super contributions, salary sacrifice contributions, and compulsory super guarantee payments made into your SMSF, as well as any rent your fund receives on the property, can all be used by your SMSF to help cover the loan repayments.
It’s also important to have a sound strategy in place to pay the property off over time.
Things to weigh up
Buying property through an SMSF can be a powerful way for business owners to build their superannuation, ensuring you will be able to live the life you want in retirement. However, it’s important to be clear about your obligations and have the time, money and ability to meet them, as there are rigorous auditing and reporting requirements for an SMSF and the ATO can impose harsh penalties for those who do not comply, so it is vital you get appropriate tax, legal and financial advice.
Source : AMP Financial Planners