Investing in Property through Super
As many would be aware the growth in the use of selfmanaged superannuation funds (SMSFs) over the last few years has been staggering. This growth has been particularly noticed in the use of SMSFs for property investment activities.
In the article below we consider some of the common questions we are regularly asked by our clients.
Can my SMSF invest in property?
Yes, a superfund can invest in property.
Whilst there are restrictions placed on superfunds with respect to property investments, investing in property is broadly a part of an appropriate planned investment strategy.
This could include an investment in land, holding an investment property such as a unit or the acquisition of a property that is used as business premises. Given the low tax nature of the superannuation system, there are significant benefits that can be realised from this strategy.
Can my SMSF buy a holiday house?
As a general rule assets held inside a superannuation fund cannot be used for private purposes. Therefore you cannot use your superannuation fund to buy a house that you use for holiday purposes (or generally a house that is rented to family members).
Can I sell a property that I already own to my SMSF?
Your superfund is prohibited from purchasing a property from “related parties”. This is a wide ranging definition and will generally include any family, trusts or companies in which you have an interest.
There is however an important exemption from this rule, which applies where the property is “business real property”.
In general terms, this is property which is used in the conduct of a business (ie. commercial property as opposed to residential property).
This exemption can therefore create an opportunity for your SMSF to purchase your business premises, even if it is already owned within the family group. When linked with available small business capital gains tax concessions, this can create significant benefits in a group structure.
Can my SMSF borrow money to invest in property?
Prior to 2007 superannuation laws did not allow funds to borrow money.
Since then funds have been able to borrow where the borrowing structure meets certain strict requirements. One key restriction is that the borrowing must be “non-recourse” – this means that the only recourse of the lender in the event of default is against the asset acquired.
No other assets of the SMSF can be used as security for the loan. The asset also needs to be held in what is commonly referred to as a debt instalment trust, which increases the establishment cost and complexity of the structure. This structure will require a separate bare trustee (usually a corporate trustee) and bare trust deed to be established and must be planned in advance of any property purchase.
The ability to borrow within an SMSF has dramatically altered the investment landscape for funds. Much of Sydney’s current property boom is thought to be linked to the explosion of investments by SMSFs.
In dealing with banks over recent years with respect to SMSF borrowing, we have noticed that the banks have now come a long way in their understanding of lending within super and the degree by which they are now prepared to lend money to superfunds. Most will lend to a maximum of 60-70% of the property value, in order to ensure the SMSF always has sufficient equity in its investments.
My SMSF doesn’t have the necessary equity - can I borrow personally against my other assets and lend the additional money to my SMSF?
Yes you can but it is very important that the loan from you to your SMSF is appropriately structured and documented. In particular, it will not be possible for your SMSF to offer either the property being purchased or any of its other assets as security for your personal borrowings.
Can my SMSF develop a property it has acquired?
A qualified yes.
Whilst a superfund can renovate a property it owns, there are particular issues to be addressed if there is any borrowing in place within the SMSF in relation to that property. The key requirement of which to be aware is that the SMSF must use existing cash reserves within the fund to undertake the development – it cannot borrow additional funds. In addition, some forms of development can take a SMSF out of mere investment and into the realms of business, risking your SMSFs concessional tax treatment.
As a result, planning property improvements and development within your superfund requires careful planning and structuring before it is undertaken.
Can I make additional contributions into my Superfund to partly pay for the property acquisition?
The property acquisition within the superannuation fund can be funded in three ways or a combination of these. They include the money that already sits in the fund, borrowing money as noted above or through additional contributions.
Additional non-concessional (after tax) contributions can be made in accordance with the following table.
Please note that our comments above are only general in nature and should not be considered a substitute for specific advice. Whilst the rules associated with operating a SMSF are complex, the ability to hold property and borrow money offer significant planning opportunities for clients.
For further information contact Prosperity Advisers on (02) 4907 7222, email firstname.lastname@example.org or visit www.prosperityadvisers.com.au.