Guide To Using Superannuation To Buy A Property Investment
What are the rules to using super to buy a house or an apartment as an investment?
The first regulation to buying an investment property with your superannuation is that only self-managed super funds allow for direct purchases of investment in residential property. So, unless you have a SMSF set up, you cannot buy a residential property as part of your super. You can of course have indirect exposure to residential investment property via retail, corporate or industry super funds.
SMSF cannot exist without a clearly defined investment strategy detailing how the investment will maximise member investments and take into account each members term to retirement, outline how benefits will be paid to the trustees, and maintain liquidity.
Trustees can set up their own strategies, but they should consult a professional superannuation specialist of financial advisor to ensure it is done correctly.
To find out more about setting up a SMSF read the ATO guide on SMSF here.
In addition to the rule that you can only buy residential property through your SMSF you must also comply with the following. The property must:
- Meet the ‘sole-purpose’ test of solely providing retirement benefits to fund members or to their dependants if the member dies before retirement
- Not be acquired from a related party of a member
- Not be lived in by a fund member or any fund members’ related parties
- Not be rented by a fund member or any fund members’ related parties.
For more information visit moneysmart.gov.au
What are some of the benefits of buying a property with super?
Capital gains and rental income generated by your SMSF owned property are generally taxed at a low rate of 15% and the tax rate on capital gains drops to just 10% after you’ve held the property for more than a year.
If you sell your property after you go into pension phase, you’ll pay no capital gains tax and if you hold the property, you do not need to pay tax on any rental income you receive during the pension phase.
You can use your SMSF to purchase a business property and then use it as your business property. In this case your business becomes a tenant of your SMSF and pays rent to it like it would to any other landlord. Keep in mind the SMSF cannot buy the business itself, only the property.
If you buy a brand-new property as part of your SMSF, you are most likely to be eligible to claim deprecation on both the building and the plant and equipment within it. From an investor standpoint it provides you with a higher total base tax deduction entitlement as you are able to combine the value of the building, along with its fixtures and fittings.
Any rental income from your investment property will go straight into your superannuation fund which helps build your SMSF.
Importantly talk to your accountant and a SMSF specialist to ensure these benefits apply to you.
Can I buy an investment property outright via my SMSF?
Yes, if you have the cash in your SMSF you can buy both residential and commercial properties outright, without taking out a loan.
Can I borrow money to buy a property with superannuation?
Yes, you can apply for a SMSF loan to buy an investment property however legislations requires the loan must be a ‘Limited Recourse Borrowing Arrangement’. This allows the lender to hold the property as security however any existing or other assets held by the SMSF cannot be used for additional security. Keep in mind that not all lenders offer these loans so talk to your Oxgyen Home Loans Mortgage Broker about finding the right lender for you.
Regulations also require that the property acquired with borrowed money must be held by a bare trust with the SMSF being the beneficiary of the trust. Talk to your accountant or financial advisor to ensure these are set up and structured correctly.
A bare trust is simply the registered holder of the property until the loan is repaid. The SMSF will receive rental income from the tenants and will pay the interest to the lender. When the loan is repaid in full, the legal ownership of the property will be reverted to the trustee of the SMSF.
These loans vary from regular loans and are generally more restrictive. While each lender’s restrictions would vary, they most likely will:
- Require higher deposits – generally a 30% deposit
- Lend you a lower percentage of the property’s value
- Restrict the borrower from redrawing funds
- Not allow you to increase the loan amount in the future
- Regulations won’t allow you to withdraw all the funds from your superannuation to pay for the investment property, you will be required to have surplus funds still within your SMSF
It is essential that you talk to your SMSF specialist and accountant about setting this up correctly.
Can I buy a property off the plan?
Yes, you can buy a property off the plan in your SMSF, providing it complies with government rules and regulations. Here is a look at some of the benefits and risks that you should be aware of.
The benefits of buying a property off the plan in your SMSF include:
- You normally only need to pay a 10% deposit when buying off the plan. It is not until settlement that you are then required to pay the balance, therefore giving you extra time (often 12 months or longer) to accumulate more money within your SMSF.
- Given you’ve only paid 10% at the time of purchase, your SMSF may benefit from the equity growth over the period it takes to complete the development
- If you borrow money to purchase a property within a SMSF you cannot increase the loan down the track. Therefore, if you’re buying an existing property that needs money spent on renovations or improvements, you’ll need to fund this with existing cash funds. However, if you buy a property off the plan, it is unlikely it will need renovations in the short term and in many cases the builder will provide a builder’s warranty that usually lasts 7 years reducing the risk of needing to spend money on the property
- The deposit is held in a solicitor’s trust fund which means that if the project does not complete, the deposits are often refunded to the buyer, often with interest earned. Importantly check you contract to see if this applies to your property.
What are some of the risks of buying a property off the plan in your SMSF?
- Lenders financing approval normally lasts 3-6 months. When buying off the plan you may not need to pay the full amount for 12 months or so, therefore there is a risk that you won’t get bank financing at a future date. Life changes that impact your superannuation such as quitting or losing your jobs, starting a new business etc may weaken your position for borrowing within you SMSF at completion, which in turn may have an impact on how much you can borrow.
- There is a risk that the value of the property may drop between the time you pay the deposit and settlement and that the bank valuation for your loan assessment may be below the purchase price. If this happens you will be required to fund the difference.
A final word
Using super to buy a house or an apartment as an investment property is highly regulated and comes with a number of complications. Before you consider this as an investment option, it is paramount you discuss your plans with a SMSF financial planning specialist and your accountant well in advance.
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