Tax Breaks or Jail Time – SMSF Borrowing is Far From Straightforward

Author – Graeme Salt

Buying a property in your Self-Managed Super Fund (SMSF) offers attractive returns; get it right, and you have invested in property in a low-tax environment, but get it wrong, and you can be in deep do-do with the taxman.

If you are going to invest in property via your SMSF, it’s vital you get it right.

Here are the pros and cons of property and SMSF

Tax savings

The strongest argument for investing in Super is the tax savings; if you buy and hold property within your SMSF until you retire and then start drawing a pension from your fund when the fund sells the property, the transaction will generally be exempt from capital gains tax.

Also, any income your fund receives (i.e. rent) while you are drawing a pension will be completely tax-free.

Before you start to draw a pension from your SMSF, any rental income generated will be taxed at a maximum of 15per cent. And, if the fund sells the property after holding it for at least one year, your fund will only pay capital gains tax on the sale of the property of up to 10 percent.

Whereas, if you were to buy the same property in your own name, income is taxed at your personal tax rate (possibly as high as 46.5 percent).  This tax rate would also apply to any capital gains payable on the sale of the property.

Get the Right Structure

Not only could you benefit from buying in Super, but there’s also an army of lawyers and accountants who do!

To buy in your SMSF, you need to set up a myriad of Trusts and Trustee companies, particularly a Bare or Holding Trust that will initially own your Super Fund.

In a worst-case scenario, get the structure wrong, and you could pay Stamp Duty twice!

Get the Right Loan

An SMSF loan is not your average loan.  You can only borrow money to purchase an asset within an SMSF by using a limited recourse borrowing arrangement (LRBA) which means any recourse the lender has is limited to that property in your Super.

Consequently, the banks have created specific SMSF loans – which good brokers know how to arrange

Get the Right Property

If you are an intrepid renovator, SMSF properties are not for you as the only works you can do on your Super property are repairs and maintenance.

If you find a fixer-upper, if you buy it in your Super, it pretty much has to stay in the condition; want to improve the value of a property?  SMSF lending is not for you.

And you can’t invest in your own home.  Even if you wanted to buy a house in your SMSF and then rent it to yourself at market rates, that is against the law.

If you buy the wrong property in Super, you could be facing a massive tax bill.

Get the Right Lender

Banks are cautious about lending in Super – after all, these are your retirement funds they are dealing with!  In fact, ANZ is so cautious about SMSF lending that it does not do it – full stop.

Apart from being sure that you have got the legal structure set up correctly with all the Trusts etc., they want to be sure that your Super is strong enough to cope with the ups and downs of an investment property – many banks now have a ‘liquidity test’ where they expect you to have other assets in your SMSF apart from the property so that you can cope with things like a period when the property is untenanted.

Next Steps

Most of us would like to live in a tax-free environment and investing in Superannuation can offer just that – and with healthy returns too!

But get it wrong, and you could end up with a property you don’t want, a massive tax bill and legal fees.

If you want to know more about how to buy property in Superannuation, please contact me for a no-obligation consultation on 1300 30 67 67.