Property + Your Self-Managed Super Fund
Written by: Helen Yau l Accounting + Advisory Team
Did you know that with a self-managed super fund, you can purchase commercial or residential property inside the super fund and this can provide many tax benefits?
Did you know a self-managed super fund can borrow money from a financial institution to buy a property?
Owning a commercial property in a self-managed super fund provides a plethora of benefits. The commercial premises can be leased to the members for their business. This strategy allows the business to be able to claim a tax deduction for the rent in their business all while growing their superannuation for their retirement years.
The direct-held property makes up approximately 19% of all self-managed super funds, indicating many SMSF trustees consider it as an important and significant part of a diversified portfolio – the proof is literally in the numbers. There are numerous strategies and ways for property to form part of a self-managed super fund’s investments and each must be carefully considered.
What Is A Self-Managed Super Fund?
A self-managed super fund is simply a type of superannuation fund. It is a superannuation trust structure that provides benefits to its members upon retirement. The difference between an SMSF and other types of funds is that the members of a self-managed super fund are also the trustee and a self-managed super fund is established to provide retirement benefits to its members.
Entering into retirement is one of the biggest life changes that will happen to us throughout our lives. With a self-managed super fund, you have complete control over your biggest asset that you have worked towards your entire life.
A self-managed super fund can have between 1 – 6 members where each member acts as trustee of the fund or if there is a corporate trustee, each member acts as director of the company. Therefore a self-managed super fund is well suited to individuals, couples and families. All members of the self-managed super fund must be trustees, and all trustees must be members.
Self-managed super funds are ideal for those who like the control and flexibility that comes with running their own fund and making their own investment choices.
Financial Advisory Services: Investment Strategy First!
Before any investment decisions, it is imperative as well as a legal requirement, that you as a self-managed super fund trustee, must consider your investment strategy.
Your strategy should detail such things as how much exposure you would like to the property market, the form of exposure and how appropriate it is for your current circumstances.
A well-diversified portfolio is essential to provide income for retirement and spread investment risk so that any single asset class, such as property, does not dominate your self-managed super fund risk and returns.
Investment Management Advice For: Direct Investment
A common form of property exposure is a direct investment into a property. This can be in the form of either a residential property or a commercial property. When purchasing a property with a self-managed super fund’s cash there are some important considerations that must be worked through, including:
- Your asset allocation and diversification
- Potential rental income and property expenses
- How close you are to retirement and the need for liquid assets to pay pensions
- Unless the property is a business real property (BRP) you or your related parties cannot use the property:
- If the property is business real property you may be able to work from the premises which is owned by your self-managed super fund
- You may also be able to utilise the small business CGT (Capital Gains Tax) concessions and contributions limits
Considering Your Financial Goals Via: Limited Recourse Borrowing Arrangements (LRBA)
Self-managed super funds may also invest in property through limited recourse borrowing arrangements (LRBA).
These are complex borrowing structures that allow SMSF trustees to take out a loan from a third-party lender. The self-managed super fund trustee then uses these funds to purchase a property to be held in a trust. The lender only has recourse to the property held in the trust – this is why the loan is “limited recourse”.
A limited recourse borrowing arrangement should only be utilised when it is the right structure for your self-managed super fund on the basis of SMSF Specialist Advice.
Some very important considerations in addition to the ones above include:
- Can your self-managed super fund maintain the loan repayments over a long period of time considering asset returns, interest rates, liquidity, and contribution caps?
- Evaluating set-up costs and structures
- Is your property valuation accurate?
- You cannot use borrowed money to improve the asset or change the nature of the property at any time
- Do you meet the strict bank lending requirements?
- Typically, lenders require the self-managed super fund to have a minimum of net assets of $200,000 or more and for the loan to have a loan-to-value ratio below 70%
Investment Advisors For Your: Indirect Investment
Another way to gain exposure to the property for self-managed super funds is through indirect investment.
This can include listed investment vehicles such as listed investment companies and exchange-traded. Managed investment trusts are also a common investment for self-managed super funds to gain exposure to property.
Investing directly may suit your self-managed super fund needs more than a purchase of a property because it is relatively simple and most likely will not require a large amount of capital. It also allows your self-managed super fund to get exposure to large-value properties such as office blocks, shopping centres and industrial property that would otherwise be out of reach.
Investing in these products should be accompanied by self-managed super fund specialist advice from our Advisory Team and seeing our very own Self-Managed Super Fund Specialist, Helen Yau.
Canny Advisory + Your SMSF Advisory Needs
Having an SMSF Specialist Advisor, like our very own Helen Yau, can help you understand how the different forms of property investment may or may not be relevant for your self-managed super fund portfolio as well as the impacts that it may have on both you and your SMSF.
If you would like to learn more about self-managed super funds or if you are well established in your self-managed super fund journey but would like to have a chat with our team about your options for direct-held property get in touch so we can find out how we can help you make the most of your SMSF.
