Investing in commercial property through a Self-Managed Super Fund (SMSF) has grown in popularity over the years. The Australian Taxation Office (ATO) reported that as of June 2022, there were over 603,000 registered SMSFs in Australia, with over one millon members.
Savvy Australian investors are increasingly taking control of their Superannuation and are using the fund to invest in commercial property as part of their investment portfolios.
A SMSF is a great vehicle to help you purchase property and grow your retirement wealth, particularly when you’ve run out of your personal borrowing capacity. However, like many other regulated financial tools, Self-Managed Super Funds can be quite complex.
In this comprehensive guide, we’ll cover everything you need to know about Self-Managed Super Funds, including what they are, how to buy a SMSF property, and their pros and cons.
What is a Self-Managed Super Fund?
A Self-Managed Super Fund (SMSF) is a specialised trust specific for your retirement. A SMSF can be established by one to four people to provide future retirement benefits. This specialised retirement vehicle is managed by yourself, with guidance by an Advisor if needed, rather than having it managed by a benefits provider.
A SMSF gives members control over their Superannuation by allowing them to decide.
- How much to contribute to the fund
- Where and how much of it is invested
Subject to some specified exceptions, all members of a Self-Managed Super Fund must be Trustees of the fund, or Directors and Shareholders of the Fund’s trustee company. If the Super Fund has more than one member, each Trustee is equally responsible for the decisions made about the Fund, unless it reports on a segregated basis (direct assets per member), in which they will have responsibility over their own member assets.
Investing in Commercial Property
Investing in commercial property through an SMSF has some advantages over residential premises. The rules relating to purchasing residential property through SMSF stipulate that the property can’t be occupied or rented by you or any other Trustee.
In contrast, related party transactions for commercial properties in a self-managed super fund is allowed. This includes buying commercial property that is related to the party owned and rented by a SMSF that you are currently a member of.
You will need to consider the “sole purpose test” and other laws set out by the Superannuation Industry (Supervision) Act 1993 (SIS Act), ensuring that the SMSF is only providing retirement benefits to fund members.
Investing in Residential Property
As mentioned, property purchased through a Self-Managed Super Fund cannot be lived in, or rented, by you or any other Trustee. So, if you’re thinking of buying a holiday home in your SMSF and living there in summer, think again.
Unlike a commercial property, you are also not allowed to sell, or contribute, a related party residential property into your SMSF to increase your member balance.
How to Buy Property with a SMSF
If you don’t have a high enough member balance, but you still want to invest your retirement savings in commercial property, there are options available. A SMSF isn’t allowed to borrow money directly, unlike the earlier years of SMSFs. A work around is to invest via a special purpose Fixed Trust, or Bare Trust. The investment must still meet requirements set out by the SIS Act.
It is also a great way to accelerate the growth of your retirement savings and maximize your capital growth. If you’re an entrepreneur or business owner, borrowing and purchasing your commercial premise via a SMSF may be a great way to slingshot your retirement funds, enabling you to pay rent directly to the SMSF earlier than usual.
Tax consequences of SMSF Property Investment
One of the top reasons investors prefer to buy a property through a Self-Managed Super Fund is to take advantage of the tax benefits SMFS offer.
All SMSFs are taxed at a rate of 15% while in the fund accumulation phase, which is significantly lower than most people’s marginal tax rates. When in pension phase, the portion of a member’s balance in pension phase is fully exempt from tax.
Note, the 15% tax rate only applies to complying funds. If you fall under a non-complying fund, which means you’re not an Australian resident or have been served with a notice of non-compliance due to a breach, your tax rate could soar to 45% (even on non-cash related transactions like unrealised gains).
Capital Gains Discount
Another potential benefit of SMFSs is the Capital Gains Tax (CGT) discount. Using a SMSF to purchase business premises can increase your gains significantly, while still enjoying a lower than usual taxation percentage. Although the discount allowed for CGT assets held for at least 12 months is only ⅓ (verse 50% in an individual Australian Taxation resident).
This means that the usual 15% taxation on any gain will be reduced to 10% if held in the fund for more than 12 months, or 0% if you’re in the pension phase and are under the relevant caps.
Some Pros and Cons of Investing in Property with Super
Buying an investment property through SMSF can be a great way to diversify your fund’s assets and expand your investment portfolio. However, much like any other investment, SMFSs have their fair share of pros and cons.
Pros
- Low tax rate of 15%
- Reduced capital gains tax (⅓)
- Direct control over your investment
- You can use borrowed funds via special trust vehicles to purchase a SMSF property
- Lower overall costs with a SMSF if the member balances are significant due to the fixed costs
Cons
- Increased fees in addition to the regular SMSF costs, and higher costs than industry funds if your member balance is significantly low.
- Managing a SMSF can be challenging and time-consuming
- Can’t leverage personal benefits
Wrapping Up
Having control over your financial future is one of the keys to financial success, and Self-Managed Super Funds can play a significant role in helping you achieve that.
SMSFs give you the freedom to decide how you’d like to manage your retirement funds and what property to invest in using the Fund. Self-Managed Super Funds offer many benefits, including tax breaks and being able to borrow money to purchase a Self-Managed Super Fund investment property.
This article provides general information only, and if you do decide to set up a SMSF, you will need to understand your obligations as a member.
Our role at Odyssey Advisors is to apply the decades of experience that we’ve accumulated in the SMSF space and apply our knowledge to your unique financial, personal and professional circumstances.
If you have any questions about setting up a SMSF, reach out to our experienced team today.
Share this: