Buying Property With Your SMSF Superannuation

If you’re looking to invest in property within Australia but aren’t quite confident in your cash flow, then perhaps purchasing through a self managed superannuation fund (SMSF) is the way to go. SMSF’s are pretty straightforward in regards to what they offer. Instead of paying your super into an industry fund, you pay it into a trust that you run by yourself or with trustee partners. It is very important though to have a strong SMSF property investment strategy in place.

The obvious draw card being that you get complete control over what assets you invest in. In addition, all the ongoing costs of owning the property are also paid by the fund, meaning you’re not left out of pocket in the same way you would be with a direct investment.

There is however limitations and regulations that characterise SMSF property investment – read on to learn just what it takes to buy using a self managed super fund.

SMSF Property Investment Rules

In order to purchase an investment property through your SMSF you must comply with the following criteria. Your SMSF must in all respects:

  • Meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
  • Not be acquired from a related party of a member
  • Not be lived in by a fund member or any fund members’ related parties
  • Not be rented by a fund member or any fund members’ related parties

Please note that even though you cannot purchase a property with the purpose of renting back to an associate of the trustee, you can buy your business premises and pay rent directly back into your SMSF at the market rate.

SMSF Set Up Checklist

Establishing your own super fund with the intent to purchase an investment property requires you to follow these steps in the correct order:

  • Ensure that you understand all necessary tax obligations and the responsibilities of running your own super fund. This step is crucial to guaranteeing that everything runs smoothly
  • Consider whom you would like to invite as an associate. In a SMSF there can be as many as three people involved, with the vast majority of Australians choosing family members. There is however ample freedom and flexibility with whom you can register
  • Choose a trust deed. Note that this deed should be selected based upon the knowledge that is has potential to maximise your SMSF
  • Make sure that you register for tax, get insurances (that will be owned by the SMSF) and set up a bank account that’s established as a trust
  • Notify your employer you’ve set up a SMSF through a letter of compliance. You are also required to put together another letter for them which lists the methods in which contributions can be made to the fund
  • Develop your own SMSF property investment strategy or with the assistance of a professional financial advisor that you can trust (recommended)

The Advantages

  1. You have direct control over your super investments and the diversification of your portfolio. One thing to note however is that even though you have total control of your investment property, the ATO does not permit SMSF trustees to fund renovation or development via borrowings
  2. If you’ve purchased an investment property with your SMSF and you manage to keep the property right up until you retire, then your super will go into its pension phase. This means that you pay no capital gains tax if you decide to sell during this period or on the rental income if you lease it out
  3. As an add on to the previous benefit; owning an investment property in your SMSF is highly tax effective. This is due to the fact that any tax on super is marked down so that earnings within the fund are only taxed at 15% – not to mention that all earnings within the pension phase are actually tax free
  4. SMSF gives you a greater amount of purchasing power than if you were to directly invest in property. This is because your savings outside the superannuation environment – or even your individual savings within superannuation – may not be sufficient to invest in property

The Disadvantages

  1. There are explicit regulations noting that you cannot live in the property yourself, nor can any friends, family members or associates. This rule is enforced regularly by the ATO and there are no excuses for breaking it
  2. You cannot purchase an asset that is ether directly or somehow indirectly (yet still) related to trust member or associate of a trust member
  3. Setting up a SMSF can be costly not to mention time consuming. There’s also the added hassle of obtaining a loan through your SMSF, which is often subjected to additional fees on top of your set up costs
  4. If you have only one or two large properties in your SMSF it could be at risk of lacking in diversification, which can leave you exposed to a downturn in the market or financial hardships
  5. Running a SMSF is complicated and penalties for getting things wrong are high

Our Recommendation

Buying an investment property with your super is tricky. You need to be completely aware of all the rules that go with an SMSF purchase, a solid fiscal backing plus a near endless capacity for patience.

Our recommendation is to seek sound financial advice before you make a judgement call on whether following a SMSF property investment strategy. While it is a fantastic way to invest in your retirement, you should also consider whether or not you’re putting all of your eggs in one basket.


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