Using a self managed super fund (SMSF) to buy property is becoming increasingly popular, perhaps encouraged by Australia’s perception of the safety in a bricks and mortar investment. However, the decision to acquire property through your SMSF is one that requires careful consideration.
In the past buying direct property inside of super has been out of reach for most Australians due mainly to the costs associated and high entry level prices. However, a SMSF can now borrow to purchase property via a Limited Recourse Borrowing Arrangement (LRBA).
A LRBA allows a SMSF to use borrowed monies to purchase a single asset (such as a residential or a commercial property), or a collection of identical assets that have the same market value (such as listed shares). The SMSF trustees receive the beneficial interest in the purchased asset but the legal ownership of the asset is held on trust until the loan has been repaid in full. The upside is that with a LRBA your whole super fund is not at risk if the loan is defaulted. There are also restrictions on the way a debtor can recover their funds.
There are significant advantages to buying a property in a SMSF including the fact that the fund will pay a maximum 15 per cent tax on the rental income from the property, which is considerably lower than most people’s personal tax rates. On properties held for longer than 12 months, the SMSF will be taxed at a discounted capital gains rate if the property is sold during the accumulation phase, and if the property is sold when the SMSF is in pension phase, the capital gain will be tax free.
