Investing in Property with Superannuation

Since 1992, when superannuation became mandatory in Australia, self-managed superfunds (SMSFs), have become an increasingly popular option for Australian investors. A SMSF offers the same tax benefits and concessions as retail, corporate and industry funds. The key difference is the ability to control an investment strategy and own direct property. It is possible to build long-term retirement wealth by purchasing a property through a SMSF, but this strategy does not work for everyone. Here is a list of pros and cons of purchasing a home through a SMSF.

The 5 main Benefits of Buying Investment Property with a Self-Managed Super Fund

Tax-Effective

Super funds are designed to be the preferred retirement saving vehicle. The earnings in your superannuation funds are only taxed 15%. It is a much lower tax rate than you would pay if you were to invest in your own name.

Business Benefits

You can rent a commercial property to your business through an SMSF (but not a residential one). The lease must be paid at the current market rate, but all the income goes to your SMSF.

Purchase Power Increased

SMSFs can have as many as four members. Combining your capital with that of the other SMSF members can provide you with extra purchasing power to use for investing.

Reduced Capital Gains Tax

When held within a SMSF, property can offer tax benefits in relation to CGT. The fund can receive a discount of one-third on capital gains made upon the sale of properties that have been held longer than 12 month. This reduces any capital gains tax to as little as 10%.If you sell the property after you have reached your preservation age and converted your superannuation to pension phase CGT can be reduced to zero.

Direct Control

The SMSF is one of the few superannuation structures that allows you to directly own property. You can also control your investments and your overall portfolio diversification within the SMSF. 

Although there are many benefits to investing in a property through a self-managed super fund, you should also consider the cons before diving into it.

You can't leverage personal benefits Investors should understand that all transactions made through a SMSF are to be conducted at "arms length". You can't rent, buy, or sell from a related party. You cannot purchase a home for your children through your SMSF. You cannot live in the property your SMSF invests in.

Diversification Reduced Diversification means not putting all your eggs into one basket. For a fund with less than 500k, a direct property investment would represent a large percentage of the total assets of the fund. This could mean that the fund is not adequately diversified, or that it has too much exposure to a single asset class ie residential property. Investors should be aware of the extra risk associated with highly specialised investment strategies.

Cash Flow Deficiencies The capital borrowed to improve or build the asset can only be taken from the superannuation fund. Investors should ensure that the SMSF has enough cash to cover all costs. Property is seen as an illiquid asset: it cannot be liquidated to cash quickly. Owning a Property in a SMSF can lead to a lack of liquid assets. This could mean that the SMSF has insufficient cash to cover expenses.

Complexity It can be very complicated to invest in an SMSF and there are heavy penalties if you make a mistake. You will need professional help to run the fund and they can guide you through all the rules and regulations. Trying to do it yourself is fraught with risks.

Setup costs and ongoing charges The set-up fees for property investments made within the SMSF will be higher than those purchased with cash, especially if there is a mortgage involved. When purchasing property via a SMSF, investors should carefully consider any associated set-up costs. SMSFs must also have an annual audit and tax return completed by a registered and qualified tax agent. This is another cost that should be taken into consideration. 

Watch the explainer video below were we explain how this actually works.