PROPERTY PURCHASE WITHIN AN SMSF
The regulations around self-managed super funds (SMSFs) and property are crucial to comprehend if you’re thinking about purchasing a property with your fund.
The “sole purpose test” will be violated if the property is not used for the exclusive purpose of paying retirement benefits to SMSF members. Consequently, you are not permitted to occupy real estate held by your SMSF, nor can your relatives.
Other guidelines to take into account are as follows:
- A residential property cannot be:
- acquired by the fund from a member or a member’s connected party;
- rented by a fund participant or any associated entity.
- Commercial property that is exclusively for business purposes can be:
- bought by the fund at market value from a member or a connected party, if applicable. There is a violation of the super laws if the trustees cannot provide proof that their property is utilized exclusively for commercial purposes or is shown at market value in the financial statements.
- leased to a fund member or a fund member’s connected parties at market value.
Tax Advantages of Property Investing in an SMSF
Investing in real estate through an SMSF has a number of advantages beyond the increased control and flexibility it provides, such as being a tax-efficient investment approach.
Because the ATO only taxes the net rental income from your SMSF property at a rate of 15%, as was previously said, investing in SMSF properties is a tax-effective choice, particularly for people in higher income tax brackets.
- However, there are a few more tax advantages as well, such as:
- During the pension period, all rental income you receive into the fund is tax-free.
- If you own an investment property in an SMSF for over twelve months, you may be able to receive a discount on your capital gains tax obligation, which lowers your taxable gain to just 10%.
- The interest you pay on any loans you take out to buy the investment property is tax deductible.
Cons of Property Investing in an SMSF
Like any investment, there could be some disadvantages to take into account:
- Complex Regulations: Purchasing a property through an SMSF is a complicated and time-consuming procedure because of the tight rules and compliance requirements.
- Higher costs: An SMSF’s setup and upkeep costs may exceed those of conventional superannuation funds.
- Responsibility: Members of SMSF oversee and maintain compliance with rules while managing their own investments, including real estate.
Fees and Charges when Purchasing Property
The acquisition, ownership, and eventual sale of a property inside an SMSF may be subject to significant fees and levies. These will deplete your super balance, therefore you must make sure the income in the fund will pay for these expenses as well as provide room for expansion.
Many people believe they can repay themselves if they donate personal funds to the purchase and the super fund receives the money. It’s not true as stated. Although you may use your own funds to assist in the purchase of the property, these are regarded as personal contributions to your super fund and cannot be taken out until you reach preservation age.
Compliance
As the trustee of an SMSF considering a real estate investment, you should make sure the venture conforms with the super regulations. Penalties may be imposed for violating the super laws, and you can lose your authority to manage your SMSF and be disqualified as a trustee.
Should you suspect that the property investment made by your fund is in violation of the super regulations, you should speak with an SMSF consultant to learn how your SMSF can address any infractions. Additionally, you might choose to use our SMSF early engagement and voluntary disclosure service to make a voluntary disclosure.