Even though Self Managed Super Funds (SMSF’s) have been allowed to borrow since 2007, Australians have only recently started to embrace the strategy. Here are 10 pointers that are essential if you’re thinking of purchasing property in your SMSF.
What you CAN do in Super:
Borrow to purchase property – Just like ordinary lending from the bank, your SMSF can now put down a deposit and borrow the remaining funds required to purchase property – subject to approval. Check with your lender for rates and lending limitations.
Purchase commercial property to be used by your own business – Unlike residential arrangements, your SMSF can purchase commercial space such as an office and lease it back to your company. You effectively become your own long-term, blue chip tenant.
Pool your assets – Keen to acquire property but not sure if you have the funds for a deposit? Your SMSF can be made up of a number of providers and benficiaries, each putting in their own funds to secure the property.
Lending to your SMSF – If you’re looking to purchase a property and would like to take advantage of the tax benefits within Super, why not lend your SMSF the funds it needs to make up the deposit? The SMSF effectively repays the funds back to you as a loan and benefits from the reduced tax rates the asset enjoys within the Super environment.
Maintain and repair the property – according to the ATO, “‘maintaining’ ordinarily means work done to prevent defects, damage or deterioration of an asset, or in anticipation of future defects, damage or deterioration, provided that the work merely ensures the continued functioning of the asset in its present state. The term ‘repairing’ ordinarily means remedying or making good defects in, damage to, or deterioration of an asset and contemplates the continued existence of the asset.” For these purposes, your SMSF CAN use it’s own funds OR use borrowed funds to maintain and repair the property.
Renovate and “Improve” – According to the ATO, “In contrast to repair, an asset is improved if the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features or rights, to the asset.” This might include adding a pool or a granny flat. In these cases, the SMSF CAN ONLY use accumulated funds or funds from other sources to finance the improvements.
What you CANNOT do in Super:
Purchase residential property for your own use – this means you can’t live in the property your SMSF has purchased. Nor can you purchase a holiday home and let it out. The investment must be kept at “arms length”
Releasing Equity – one of the main inhibitors of purchasing property within your Super is that you cannot unlock the equity that the property gathers over time and invest it elsewhere (to buy another property for example). This is a major consideration if you wish to build and grow a portfolio.
Purchase multiple titles – under the current legislation your SMSF is only allowed to purchase property with a single title. You cannot purchase two properties in a single sale if they are on separate titles.
Make it a “different asset” – The ATO provides many examples of this but the ruling is quite clear. For example, you cannot buy a vacant block of land then put a house on it, you cannot convert a house to a restaurant, and you cannot pull a house down and build 3 townhouses.
There are many things that need to be considered from a tax and legal perspective when setting up such a vehicle and this is only a brief summary. We always recommend seeking advice from the relevant professionals when doing so as your individual circumstances may warrant it’s own strategy.