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Purchasing Investment Property with Your Self Managed Superannuation Fund

10 Oct 2013 Emily Smith 0 Comment

These days it’s becoming increasingly common to see properties advertised as “perfect for your super fund” – or “do it for your super fund”… have you wondered what this means?

Superannuation legislation allows Self-Managed Superannuation Funds (SMSF) to borrow to invest in residential or commercial property.

Investing through your SMSF may be a tax effective way for you to create wealth for your future, and diversify your super investment portfolio. Income from the SMSF, including capital gains, are taxed at concessional rates, so you should end up saving more money for your retirement.

There are a number of advantages to holding property inside an SMSF, as opposed to owning it in your own name.

  1. Concessional tax on rental income: Due to the concessional tax rate that applies to superannuation investment earnings, rent received by your SMSF will be taxed at a maximum rate of 15% (not your personal tax rate which might be 46.5%, or the company tax rate of 30%).
  2. Concessional tax on future capital gains: Special superannuation tax rates also apply to any capital gain made as a result of an increase in the property’s value. As a result, depending on when you decide to sell the property, any capital gain your fund makes on the sale of the property may be completely tax-free.
  3. Increased superannuation opportunities: In addition to the above, where the property owned by your SMSF is the property from which you run your own business, superannuation rules require your business to pay a commercial rate of rent to the fund – providing you with a way to accelerate your superannuation savings.
  4. Other benefits: Depending on your personal circumstances, there could also be other benefits from holding property within your SMSF. For example, superannuation assets are generally protected from creditors in bankruptcy situations.

If your super fund has sufficient money, it can purchase property in a very similar way to a personal transaction, or through any regular business structure… it’s like a ‘cash’ transaction.

If the fund doesn’t have the entire amount of the purchase available, it can borrow money (much like you might personally from a bank or credit society); however, we note there are special rules surrounding borrowing through your SMSF.

If you already own property (as long as it’s considered a ‘business real property’ meaning it is used wholly and exclusively in a business) you can either sell it to your fund or transfer it into your SMSF by way of an in-specie contribution (a superannuation contribution that is made using an asset rather than using money).

Once a property is owned by an SMSF, there are rules that relate to the use of the property. In short, the property cannot be used by you personally, unless it meets the business real property requirements.

In the event you decide to operate your business through a premise owned by your SMSF, it’s important a commercial rate of rent is paid to your fund.

So in short – there’s lots to think about. There are accountants who specialise in Self-Managed Super Funds, and if you are considering this options, they would be well worth talking to.

There is much more information about Self-Managed Super Funds at the Self Managed Super Fund Institute: http://www.smsfinstitute.com.au/smsf-buying-property.php

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