Considered in isolation, the tax advantages of holding property inside a self-managed superannuation fund (SMSF) seem to make this a no-brainer. Rental income taxed at no more than 15 per cent? Low or no capital gains tax when you sell? Where do I sign?

With that in mind, let’s consider five questions you should ask before deciding whether your SMSF should take the plunge into property. Please also speak with our SMSF property advisers.

Direct property is “lumpy” and relatively illiquid and it may not be wise to end up with, say, 80 or more per cent of assets devoted to one SMSF property investment. This may not tally with your fund’s documented investment strategy and it could cause cash-flow problems (when it comes time to pay lump-sum death benefits, for instance). That said, adding property to your portfolio can have diversification benefits.

Under the sole-purpose test in superannuation law, the property must be owned purely for the purpose of SMSF property investment for retirement. Sorry, but you can’t have the personal benefit of living in it, using it as a holiday home or leasing it to family or friends.

On the other hand, an SMSF can buy business real property from fund members, and fund members (or relatives of fund members) can use that asset as long as the lease is a typical commercial lease and at market rent. Speak with our SMSF property advisers.

SMSFs are generally prohibited from borrowing, subject to some exceptions which include limited recourse borrowing arrangements.  under these arrangements SMSFs are permitted to use borrowed funds to maintain or repair a property, but they’re not able to borrow to “improve” a property. And sometimes the difference between those two isn’t black and white.

Bear in mind that SMSF borrowing arrangements are more complex than those outside super. You’ll need specialist advice on, among other things, setting up a “bare trust”. The positive side is that the tax benefits inside super should mean the debt is repaid sooner.

As with any investment earnings inside super, the maximum rate of tax your fund will pay on rental income is 15 per cent, or zero if you’ve retired and the fund has switched into the pension phase.

If the SMSF holds the property for more than a year, it will pay a maximum 10 per cent capital gains tax on the net appreciation in the property’s value or, again, zero per cent in the pension phase.

Outside super, the rental income from the same property would be taxed at your marginal tax rate – which may be as high as 47 per cent (including Medicare levy)

And as a private property owner, you’d be up for capital gains tax levied at your marginal rate (unless selling after holding for more than 12 months whereby the capital gain is reduced by 50%).

Even with those benefits, you should still talk to your SMSF property adviser about whether investing in property via your fund is viable. You may also need to talk to a reputable property specialist about your real estate choices.

10 Important SMSF Property Rules.

Self-managed superannuation funds (SMSFs) in Australia are governed by specific rules when it comes to property investments. These rules are designed to ensure that SMSFs are used primarily to provide retirement benefits to their members. Here are some key SMSF property rules:

1. Sole Purpose Test: All investments by an SMSF, including property, must meet the sole purpose test of providing retirement benefits to its members.
2. Buying Property: An SMSF can purchase residential or commercial property. However, residential property purchased must not be acquired from a related party of a member. Commercial property can be purchased from a related party, but it must be business real property acquired at market value.
3. Borrowing Rules: SMSFs are allowed to borrow money to purchase property through a limited recourse borrowing arrangement (LRBA). Under an LRBA, the loan is secured against the property itself, meaning other assets of the SMSF are protected.
4. Renting to Related Parties: Renting residential property to fund members or related parties is generally prohibited. However, an SMSF can rent commercial property to a related party (including a member or a member’s business), provided the arrangement is consistent with an arm’s length dealing.
5. Property Development and Renovations: While an SMSF can undertake repairs and maintenance on a property, it cannot improve or develop the property if it was purchased with borrowed funds. Once the loan is paid off, the property can be improved or developed.
6. In-House Assets: The in-house asset rules restrict the amount of investment that an SMSF can have in related parties. The total value of in-house assets cannot be more than 5% of the total value of the fund’s assets.
7. Diversification and Investment Strategy: SMSF trustees must consider their investment strategy, including diversification. Investing heavily in property can lead to a lack of diversification, so this should be carefully managed.
8. Liquidity and Cash Flow: SMSF trustees should ensure that the fund has sufficient liquidity and cash flow to meet its obligations, including potential repairs, maintenance, and loan repayments for properties.
9. Regulatory Compliance: SMSFs must comply with the regulations set by the Australian Taxation Office (ATO) and other relevant authorities. This includes ensuring that the property is valued at market value for reporting purposes and that all transactions are conducted at arm’s length.
10. Insurance: It’s important to have appropriate insurance for property owned by an SMSF, as with any property investment.

It’s crucial for SMSF trustees to understand these rules and to seek professional advice, as breaching SMSF regulations can lead to significant penalties and tax implications. The ATO provides guidelines and information regarding SMSF property investments, and consulting with a financial adviser or an SMSF specialist can also be beneficial.