Wondering whether you can buy a second property through your Self-Managed Super Fund (SMSF)? You’re not alone. More Australians are exploring property as a long-term wealth strategy, and using super to buy an investment property is becoming increasingly common. But how does it all work? What are the rules around purchasing another property with your superannuation fund?
Let’s break it down.
Can I Use My Super to Buy a Property?
The short answer is yes, you can. However, it must be an investment property that complies with the sole purpose test. This means the property must solely be purchased to deliver retirement benefits to the fund members. As an SMSF trustee, you can’t live in the property or rent it to friends or family. Ensuring you fully understand these rules is essential to avoiding compliance issues. So, if your only goal is to use your super to buy an investment property, you can do so within the legal parameters.
Why Use Super to Buy an Investment Property Instead of Just Doing It Personally?
The answer to this most often has something to do with tax efficiency and asset protection. For example, rental income earned through an SMSF-owned property is only taxed at 15%, and capital gains on a property held for more than 12 months are taxed at just 10%. Plus, once you enter the pension phase, any income or gains from that property could be completely tax-free. Using super to buy an investment property can be a smart move to build long-term wealth without tapping into your personal finances.
Buying a Second Property with Super
Many investors in Australia want to build up their investment portfolio by purchasing a second property through their SMSFs. If you think the same, be sure to consult with financial and legal professionals to ensure you’re complying with the strict SMSF regulations and to assess your borrowing capacity first. Getting the right advice can make all the difference.
If you’re considering buying a second property using SMSF, it’s essential to:
Create an Investment Strategy
A comprehensive investment strategy is a requirement from the Australian Taxation Office (ATO) for every SMSF, and this strategy must demonstrate that the property is a suitable asset class for achieving your fund’s long-term retirement goals. This should take into account any risk tolerance, liquidity needs, and how the property investment will benefit the fund members in their retirement. With this strategy, you will have a roadmap that outlines how your funds will grow. It also demonstrates to auditors and regulators that your SMSF is being managed responsibly and thoroughly.
Find the Right Property
Once your investment strategy is in place, the next step is to find a suitable property. The property must follow all the necessary rules and should have strong potential to deliver consistent investment returns that will support the growth and performance of your fund. Remember, any property purchased through your SMSF must be owned entirely by the fund itself and not by you personally, even after retirement. You also can’t use your super to pay off an existing mortgage on any property held in your name, as this would be considered an early release of super and is strictly prohibited under current legislation. Breaking these rules can result in severe penalties and compliance issues.
Get Financial Advice
Navigating SMSF property rules can be complicated, and there are many factors to take in before making such a serious financial decision, so having expert advice on hand is essential. Speaking with an SMSF specialist will help ensure your decision aligns with all of your personal and superannuation goals. The specialist will help your fund stay compliant with the current rules and regulations while assessing whether your fund is in the financial position to make such a purchase.
Organise SMSF Finance
If your fund doesn’t have enough cash to buy the property outright, you’ll need to set up a Limited Recourse Borrowing Arrangement (LRBA) through a lender. An LRBA enables your SMSF to borrow money to acquire the property, with the lender’s claim limited to only the asset that is being purchased. The property will be held in a separate trust until the loan is repaid, and every repayment must come directly from the SMSF itself. An LRBA can be a powerful way to grow your SMSF portfolio, but they come with a lot stricter terms, along with higher interest rates. Being able to understand all the essential rules and costs involved is another important reason to seek professional advice and ensure careful planning first.
Complete the Purchase
Once everything is in place for you to complete your second property purchase, the SMSF becomes the legal owner of the property, and all of the related expenses, including any loan repayments and maintenance costs, must also be paid directly from the fund. Most importantly, as an SMSF trustee, you have the responsibility to manage the property and ensure it continues to serve the sole purpose of providing retirement benefits to your fund members while complying with all the relevant ATO regulations.
Managing Ongoing Compliance
SMSFs come with obligatory annual check-ups such as audits, tax returns, and strict record-keeping. You’ll need to be sure that your fund remains compliant with ATO guidelines, the property investment continues to align with your fund’s strategy, and you’re always meeting all the administrative record-keeping requirements.
If you’re considering using your super to invest in a property, it’s crucial to have the right advice on hand to ensure your fund is set up for success. Contact us through our website, or call us at 1300 781 680 to speak to an experienced SMSF specialist or financial adviser to explore whether this strategy is right for you.
