6 Tips for Setting Up An SMSF To Invest in Property
Published 7:03 am 18 Sep 2019
You have more property investment options than you might realise. DG Institute founder and CEO Dominique Grubisa explains how your SMSF may be the key to the investment you’ve always wanted.
How to set up a SMSF to buy property?
- Use a limited recourse borrowing arrangement
- Look beyond the big banks
- Do it now to protect yourself from from future regulations
- Keep the rule of thumb in mind of $250,000 in funds
- Understand the rules about renovation
- Make sure the property meets the rules
The traditional route into property investing often involves buying a home and leveraging equity to buy another.
However, this isn’t the only option open to you.
You’re also able to invest in property using your Self-Managed Super Fund (SMSF).
Investing super in property has the potential to hold a lot of wealth over the course of your lifetime. This article aims to provide you with information about how you can create an SMSF structure that allows you to do that.
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Why Invest Using an SMSF in the First Place?
There are two key benefits of investing in property using an SMSF.
The first of the SMSF benefits is that using it allows you to take control of your finances. You’re the trustee of the fund, which means you’re in full control of the financial decisions made for it.
This differs from the traditional superannuation model. In that, you contribute to a find that somebody else manages on your behalf. Typically, your employer makes these contributions on your behalf. However, you have the option of making additional contributions.
With a SMSF property investment, you’re able to make your own decisions. With the right strategy, this can prove more prosperous than sticking to the regular superannuation model.
The other key benefit is that you enjoy a range of tax benefits when investing in property using an SMSF.
The ATO highlights the most significant:
“The income of your SMSF is generally taxed at a concessional rate of 15%. To be entitled to this rate, your fund has to be a ‘complying fund’ that follows the laws and rules for SMSFs. For a non-complying fund the rate is the highest marginal tax rate”
Beyond that, you benefit from deductions related to Capital Gains Tax:
“Complying SMSFs are entitled to a capital gains tax (CGT) discount of one-third if the relevant asset had been owned for at least 12 months.”
The ATO also highlights that you can claim deductions for many of the expenses related to an SMSF:
‘Expenses that are an ordinary incident of the operations of the SMSF that gain or produce its assessable income fall under this general deduction provision (unless a specific provision could also apply and is more appropriate in the circumstances).This can include expenses such as:
- management and administration fees
- audit fees
- subscriptions and attending seminars
- ongoing investment related expenses.’
Of course, it’s important to speak to an appropriate advisor before taking any steps. Even so, there are benefits to using your SMSF, in certain circumstances.
You just need to know how.
These tips will help you to create the correct structure so that you can invest in property using an SMSF.
Tip #1 – Use a Limited Recourse Borrowing Arrangement
You have two options when buying property using an SMSF.
The first is to make the purchase using the money in the fund. However, this isn’t an option for those who haven’t saved for an extensive period of time.
The other is to create a Limited Recourse Borrowing Arrangement (LRBA).
ASIC describes an LRBA as follows:
“Borrowing or gearing your super into property must be done under very strict borrowing conditions called a ‘limited recourse borrowing arrangement’.”
“A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property.”
This protects you if the investment doesn’t work out. The lender can only chase the money that’s lost in the property if something goes wrong. They cannot access any money in your superfund that isn’t related to the property.
However, this assumes that the lender doesn’t ask for a personal guarantee, which many will do. In the case of commercial properties, you’ll also often invest a significant part of the fund in the capital.
Tip #2 – Look Beyond the Big Banks
You may experience issues with finding a lender that’s willing to issue an LRBA.
That’s because the four big banks chose not to engage in lending to SMSFs. It makes sense from their perspective as SMSF borrowing only accounts for 0.18% of the total market.
They don’t see it as a viable sector due to the amount of compliance work that’s involved on their end.
As a result, you’ll have to look beyond the major lenders to borrow the money that you need. The good news is that there are many smaller lenders out there who can provide access to funds.
They typically require a 20% deposit, though some may ask for 30%. You should also expect to pay a slightly higher interest rate than you would with a standard investment loan.
Tip #3 – Do it Now
The 2014 Murray Report examined the issue of housing affordability in Australia. It suggested finding ways to limit the activity of investors and superfunds in the market.
The point is that reports such as these could place your strategy at risk. A change in government policy could lead to more restrictions on SMSF borrowing that stops you altogether.
For example, if the Labor government managed to get into power in the last election, we may have seen changes to current policy.
Luckily, that didn’t happen. However, it shows that the possibility exists and that you need to account for it.
If you start investing using your SMSF now, you may protect yourself from future regulation changes. The laws under which you invested may get grandfathered in, which means you can benefit from them when others can’t.
However, there are no guarantees in relation to grandfathering.
Tip #4 – Keep the Rule of Thumb in Mind
The general rule of thumb for investing using an SMSF is that you need $250,000 in the fund to move forward.
This isn’t always the case. In fact, it’s entirely possible to invest with a lower sum in the fund. However, many lenders will use this rule of thumb when making their decisions. They account for the costs involved with maintaining the DIY Super fund and may decide that you’re unable to borrow.
Not having $250,000 doesn’t prevent you from borrowing. However, it can make it more difficult, especially if you’re not working with a suitable advisor.
Tip #5 – Understand the Rules About Renovation
The supposed inability to renovate is one of the key reasons that many advisors give for why you shouldn’t invest in property using an SMSF.
However, you can renovate and add value, providing you follow the rules.
The key is that you can’t use borrowed money to make these value additions. You’re not able to get a personal loan from the bank to renovate the kitchen, for example.
The money has to come out of your SMSF.
Having said that, there are occasions when you can use borrowed money. For example, you can use borrowed money to maintain the property. You may also be able to use it to replace certain assets. As long as there’s a utilitarian purpose, you don’t necessarily have to use SMSF funds in these cases.
Tip #6 – Make Sure the Property Meets the Rules
You’re able to invest in commercial, residential, or industrial property using your SMSF assets.
However, there are four key Self Managed Super Fund property investment rules that you need to stick to at all times. These are as follows:
- Any person or entity who’s related to an SMSF member may not live in the property.
- You’re not allowed to buy the property from a related party, such as a family member.
- The property must abide by the “sole purpose” rule. This means that you maintain it with the goal of creating retirement benefits for the SMSF’s members.
- You cannot rent the property to any entity or person who’s related to one of the fund’s members.
Make sure you adhere to these SMSF rules to avoid compromising your superannuation investment property.
Investing Using an SMSF
As you can see, it’s possible to invest in property successfully using an SMSF. You’re even able to make changes to that property, in the appropriate circumstances.
The key thing to remember is that this tactic isn’t for everyone. It’s entirely dependent on your personal circumstances.
For information on Self-Managed Super fund, visit DGI Wealth Management
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at firstname.lastname@example.org
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.