SMSF as an option for investors
Having a self managed super fund (SMSF) can hold benefits for property investors. Tax rates are generally lower for investments made through an SMSF and if sold at the right time, some taxes can be avoided altogether. With patience and a calculated strategy in place, investing in property through an SMSF can be a good way to secure a long term return on your investment.
What is an SMSF?
A self managed super fund (SMSF) is a superannuation fund in which members are also trustees. It is managed by members, giving them greater control and choice over how to invest their funds.
Choosing to invest in a property through an SMSF means that all trustees within the fund are stakeholders of the investment.
People may decide to invest in property through their SMSF if they have a large sum of money in the fund to finance the property in comparison to their income stream, and also to reap benefits including lower tax rates. Tax on a property purchased through an SMSF is measured at 15%, which is much lower than most personal tax rates. If the property is sold during the accumulation phase of superannuation, the capital gains tax is reduced and if it is sold at pension phase, it is tax free.
Things to consider when choosing an investment property through your SMSF include growth potential of the property, rental yields and longevity. Investing through your SMSF might seem like the right option, however there are a few requirements and limitations to this form of investment.
- Your SMSF must have enough money for the investment. Like with any investment, you need to have enough money to finance it. In most cases, an SMSF will require a 30% deposit on a property investment, so it’s important to ensure that your fund can finance the deposit as well as mortgage repayments. It’s also wise to maintain a buffer amount in your fund to account for potential market changes and tenant vacancy. Lenders will only consider your super contributions and rental income when deciding whether you are eligible for the loan, so potential rental yields as well as vacancy risk should be factored into your decision. Additionally, it is best to diversify your investment. In addition to investing in a property you may want to also invest a smaller portion in shares. This looks much more favourable should your SMSF be audited. This means you need to have additional funds outside
- The investment must comply with the ‘sole purpose test’. Investing through an SMSF must be for the sole purpose of gaining income for retirement. If the property is used to benefit trustees in the short term, it may be breaching ATO requirements. For example, after purchasing a property through your SMSF, you, your family members and any trustees of the fund are unable to live in it.
- The investment must be at ‘arm’s length’. The fund’s assets need to be bought and sold at market value and interest free loans cannot be made through the fund to family members and friends. If you have purchased a commercial property and intend to use it for your own business, rent will need to be paid at market price.
- The nature of the property cannot be changed. Maintenance and repairs are of course an exception, however renovations and developments are prohibited on properties purchased through an SMSF.
Prior to investing through an SMSF, it’s important to seek professional advice from a financial advisor in order to understand all requirements and limitations. A financial advisor will help guide you to make the right decision.
If you think investing through an SMSF might be the right option for you, talk to CPS Finance today.