Have you ever pondered the mysteries of buying property through your superfund? It's a hot topic, and we're here to unravel the who, what, when, and how for you with some added zest.
But first, a little disclaimer, this is 110% not financial advice, this is simply telling you what the law allows you to do and definitely not telling you what you should do! Now that we have the legal stuff out of the way, lets get into the nitty gritty.
How do I buy a property through a superfund?
You will need a Self Managed Superannuation Fund (SMSF) to do so.
So let's hop back a few steps and breakdown what a SMSF is?
An SMSF is a way of saving for your retirement. The difference between a SMSF and other types of funds is that members of a SMSF are usually also the trustees. This means the members of the SMSF run it for their benefit and are responsible for complying with the super and tax laws.
With a SMSF you are the boss of it, you make the decisions on what to invest in and you are responsible for ensuring all the compliance is completed like annual accounts, tax returns, annual audit etc etc (but this is where we can help 😉)
Something to note about SMSF is that they are heavily regulated by the ATO and by legislation known as the SIS Act. These rules dictate what you can and can’t invest in with your fund, who can be a part of the fund, and how you should operate the fund. The guiding principal around running your SMSF is that the fund is being maintained for the sole purpose of providing for your retirement. This means that high risk investment strategies are frowned upon. It also means that at no time can you take the superfund money for your own personal use (that rules out any cars, holidays etc that you had your eye on!). They are not to be entered into lightly and we cannot stress this enough.
OK so let's imagine you have a SMSF. The next question is what property can you buy?
There are predominately two types of property that you can potentially buy in your SMSF.
The first is commercial property as an investment property. One of the biggest benefits to commercial property is that you can operate your own business out of the SMSF property, so long as you sign a lease agreement and pay market value rent into the fund. This differs to residential property below.
The other benefit of commercial property is you can transfer any property that you already own into your fund for market value. This provides you flexibility on how you may fund the purchase, but will require significant input from your trusted advisors as it can get complicated and there are tax consequences to it.
The second is residential property BUT it MUST be an investment property with market value rent and NOT rented to a related party. The rules are very strict around any related party of the fund using the house for any purposes. So there goes your grand plans of buying your kids somewhere so they can finally leave you in peace! 😉
Heads up that you also can’t transfer a residential property you already own into your SMSF. The property must be purchased from a non-related party. Once again the property must be purchased for market value and must be rented out at market value with a lease agreement in place.
So if I can purchase a property in my SMSF can I get a loan?
This is the hard part, and where a financial advisor needs to be consulted. You will need professional assistance in ensuring you develop a strategy that is best for you and your circumstances. The ATO now prefers that you develop a balanced investment strategy that includes a mix of investments across, cash, shares, property and so on and so forth. Therefore, they would prefer that you don’t invest all the funds directly into property.
You can however take out a loan in your SMSF to purchase property but it is a very special type of loan. This is known as a Limited Recourse Borrowing Arrangement (LRBA). Not all banks will lend to SMSF but there are certainly some that will. In general, they will require a higher deposit and will cap the borrowing to anywhere from 50-80% of the property value depending on certain circumstances. This type of lending is quite specific and there are legal requirements around how it is structured, so once again your trusted advisors should be consulted to ensure everything is A-OK and squeaky clean and new structures usually need to be put in place beforehand like bare trusts, etc.
What happens after you buy the property?
The property becomes an asset of the SMSF and the Trustee becomes responsible for managing the property, finding a tenant, maintenance, costs etc.
As mentioned, if it is a commercial property you can start to use it for your own business (at market value) or you can rent it to a third party. Lease agreements and regular valuations of market value rent are critical. The agreement needs to specify who is responsible for all the costs, whether the tenant will pay some or the landlord pay them all.
A residential property is much the same, but as mentioned you can’t lease it to yourself or any related parties. Therefore, the tenant needs to be an independent third party and all transactions at market value.
Purchasing a property in SMSF can be a great investment for certain people, but the rules governing what you can and can’t do are like the movie Never Ending Story, and the ATO take it very seriously if you do something wrong.
That’s where professionals like us can help. We have heaps of experience with this stuff so we can help keep you on the right side of the law and help you grow your nest egg for retirement, because in the end that is the purpose of superannuation, to help you retire comfortably whenever that time might come! Ready to explore further? Let's chart your course together towards a comfortable retirement.
Disclaimer: This blog is for general informational purposes only. Always seek professional advice tailored to your specific circumstances.