Property Investment?

October 8, 2012

SMSF Property Rules

by Andrew Frith

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?

What’s more, there’s a view that continued low interest rates are waking the property market from its recent slumber. 

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


What percentage of the fund’s assets would end up in property?

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 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.

Do you want to be able to use the property?

Under the sole-purpose test in superannuation law, the property must be owned purely for the purpose of investing 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.

Does it qualify as business real property?

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.

Does the property need work?

If so, you’ll need to make yourself familiar with the rules regarding repairs versus improvements. SMSFs are permitted to borrow 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.

Will you need to borrow?

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 46.5 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 adviser about whether investing in property via your fund is viable and economic. You may also need to talk to a reputable property specialist about your real estate choices.

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