In recent years, using your SMSF to buy property is becoming more and more popular. But, before you acquire property through your super fund, you need to carefully consider your decision. This means that you need to ensure your SMSF supports your general investment strategy and avoids any unnecessary risks.
There are many advantages to having property in SMSF including tax. Your SMSF will be taxed at just 15 percent, which is way lower than the personal tax rate of most people. And not only will your super fund be taxed at a lower rate, capital gain tax may also be discounted.
The capital gains tax is calculated at a discount rate in case the property is sold during the accumulation phase. If the asset is sold while the SMSF is in pension phase, then the tax is free.
There are some things you need to have in mind if you plan on setting up a super fund just to buy property, regardless if it’s residential or commercial.
When you buy residential property through your super fund, you or any of your family members can’t live in it. There is a strict condition that the super fund trustee, any of its members, or relatives can not benefit from the property. The sole purpose of the purchased property is to support the super fund’s investment strategy in building up money for retirement.
Most often, people use their super fund to purchase commercial property which they can lease back through their business. However, if you are considering to do that, you should be aware of a number of specific conditions. First of all, terms of the lease have to be commercially competitive. This means that you aren’t allowed to lease it back for lower rates in order to give yourself a financial advantage. To ensure that all arrangements are compliant, the ATO monitors and audits SMSFs on a regular basis. Another condition is that all payments must be made on time, every single time, and in full. You are not allowed to skip the rent. The next condition can be time consuming and it requires a lot of paperwork, but regular valuations must be done on the commercial property. Finally, and you probably already know this, the investment must satisfy the “sole purpose test”, which is providing retirement benefits to the SMSF members.
Before you decide to buy property in SMSF, consider whether the property is a good investment, will it appreciate in value, what are the risks, and what is the yield. It is always good to have a third party opinion on the property, since anyone who has an interest in selling the property is less likely to give you objective advice.