Property in Self-Managed Super Funds
Self-managed super funds (SMSFs) entered an exciting new era from late 2007 with the ability to buy geared property. The Global Financial Crisis meant a slow start, but now opportunities abound for a SMSF to purchase property, with similar benefits to property purchased outside of super. However, it’s a complex area of the law:
Superannuation is a low-tax, even no-tax, environment. Complying super funds pay tax at a maximum rate of 15 per cent. But when in pension phase, they pay no tax. Compare this to Australia’s top marginal tax rate being 46.5 per cent and you’ll see why property in super is an exciting prospect.
Direct property is only available through SMSFs. You can’t hold a rental property through a regular super fund. But there are around 500,000 SMSFs in existence, at the time of writing, and it’s only those vehicles that can directly hold residential (or commercial) property. Do you have the time or willingness to learn how to run a SMSF? It comes with considerable responsibilities, but the financial rewards can be even bigger and better than investment properties bought in your own name.
Make your SMSF the landlord of your business premises. Many businesses are run from a property that is owned by the business, or the business’s owners. But there can be great reasons for your SMSF to own your business premises: It is an asset where ownership can potentially be transferred into your SMSF.
The size of your SMSF matters. To invest in property through a SMSF, you have two options. You either need the cash to buy the property outright. Or your SMSF needs to borrow. But even if you’re borrowing from a bank, your SMSF still needs to have at least about 30 per cent of the property’s value, plus enough left over for a lender to be comfortable that you can foot future bills and interest.
Complex structures are involved, so make sure you get it right. The laws allowing lending in SMSFs are particularly strict. And the consequences of getting them wrong are potentially costly and disastrous. There are legal structures (trusts) that need to sit inside the SMSF to hold a geared asset. And, importantly, your SMSF trust deed itself needs to allow for borrowing, which not all trust deeds do.
SMSFs have a large and growing panel of lenders who are prepared to lend in this space. Because of the GFC, banks were initially slow on the uptake of providing compliant loans. But that has changed and most major lenders are offering financing for SMSF property loans now. But beware: They can have some funny individual policies.
You can be the lender to your own SMSF. If you have plenty of equity, it is possible for you — as trustee/s of the fund — to be the lender/s to the super fund. The source of your funds might be savings, or money you have borrowed elsewhere.
SMSF borrowing arrangements are complex and professionals are mandatory. It is not the same as buying an investment property in your own name. And it’s highly unlikely that you will have the skills to do it on your own. Get help from trusted independent professionals. The penalties are too severe to bear contemplating.