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Investing in Property with Super? Here's Everything You Need to Know

Published 6/11/2024 | Last Updated 6/11/2024

Written by:
Joel Simmonds
Head of Advice  

Thinking about using your superannuation to invest in property? With an SMSF (Self-Managed Super Fund), it’s possible to purchase investment properties directly. However, there are specific rules and considerations, as well as positives and negatives, that come with this approach.

In this article, we’ll explore how SMSF property investment works, what to watch out for, and how it might fit into your broader financial goals.

Table of Contents

Can I Use My SMSF to Buy Investment Property?

Yes, you can! An SMSF allows you to pool your superannuation funds and invest in a variety of assets, including property. This flexibility means that you could buy an investment property with your super to generate rental income or capital gains, giving you control over where your super is invested.

The Benefits of SMSF Property Investment

Using your SMSF to invest in property comes with potential benefits:

  • Greater Control: With an SMSF, you decide how and where to invest your super.
  • Potential for Growth: Investing in property can offer rental income and potential capital growth over time.
  • Tax Advantages: Earnings within your SMSF, such as rental income or capital gains, are taxed at a concessional rate of 15% (or 10% for capital gains on assets held for more than 12 months).

However, keep in mind that there are also strict rules around SMSF property investments, so it’s essential to know what you’re getting into.

Potential Downsides of SMSF Property Investment

While SMSF property investment has its benefits, it’s not without drawbacks:

  • Higher Setup and Ongoing Costs: Establishing an SMSF and managing property within it can be costly, with fees for setup, compliance, audits, and maintenance.
  • Limited Access to Cash: Since property is a less liquid asset, it may be challenging to access funds quickly if your SMSF needs cash for other investments or expenses.
  • Complex Regulations: SMSF property investments are subject to strict regulations, including the need for arm’s-length transactions and limits on improvements to properties with borrowed funds.
  • Potential for Financial Loss: Property values can fluctuate, and investing a significant portion of your super in one asset class could expose your retirement savings to more risk.

These potential downsides mean it’s crucial to carefully consider whether SMSF property investment aligns with your retirement goals and risk tolerance. Consulting with financial and legal professionals can help you weigh the pros and cons before making a decision.

Can I Use My Super to Buy a Home to Live In?

Generally, superannuation is intended for your retirement, so there are strict rules about accessing it for personal use. Outside of the FHSSS, using your regular super fund to buy a house to live in is not permitted.

However, if you are thinking of purchasing property for investment through your super, that’s where a Self-Managed Super Fund (SMSF) comes in. With an SMSF, you can invest in property, but the property can only be used as an investment—it cannot be a residence for you or any related parties.

Buying Investment Property with an SMSF

Before you dive into SMSF property investment, let’s go over some of the key rules:

  1. Purpose of Investment: The property must be solely for investment purposes. You can’t live in it, and neither can any related party, like family members or business associates.
  2. Arms-Length Transactions: Any transactions related to the property must be conducted at arm’s length. This means you must buy, lease, or rent the property under standard market conditions.
  3. Funding Restrictions: You may use an SMSF loan to fund the purchase, but there are specific borrowing rules that apply. These include limitations on how the property can be improved if bought with borrowed funds.

These rules ensure the SMSF operates for the benefit of your retirement savings, rather than immediate personal gain.

How to Buy Property with an SMSF

While we can’t help with the selection, purchasing or management of property, we can support you with financial advice to help you optimise your SMSF set up, structure and financials, ensuring you get the best outcome.

Here’s the general process of starting and using an SMSF to purchase investment property: 

  1. Set Up Your SMSF: If you don’t already have one, you’ll need to establish an SMSF. This involves registering your SMSF with the ATO and setting up a trust deed, which outlines how your fund will operate. Our team can guide you through this setup process to ensure compliance and alignment with your financial goals.
  2. Research the Property Market: Look for properties that offer good rental returns and potential for capital growth. Remember, this is an investment to support your retirement, so consider both the location and type of property carefully.
  3. Secure Financing: You can use the funds in your SMSF to buy the property outright, or you may consider an SMSF loan. SMSF loans have stricter conditions and generally higher interest rates than regular property loans, so be sure to compare options. Our mortgage broking services can help you navigate these loan options to find a suitable financing solution for your SMSF.
  4. Purchase and Manage the Property: Once you buy the property, you can rent it out to generate income within your SMSF. All expenses, like maintenance costs, must be paid from your SMSF, and all income generated goes back into the fund.

Investing in Residential vs. Commercial Property

You can invest in either residential or commercial property through your SMSF. However, commercial property offers a unique benefit – it allows you to lease the property to your own business. This arrangement is commonly used by small business owners who want to manage both their business space and their super.

Tax Considerations for SMSF Property Investments

When you buy an investment property through your SMSF, the tax benefits are significant:

  • Rental Income: Rental income from the property is taxed at the concessional rate of 15%.
  • Capital Gains Tax: If the SMSF holds the property for more than 12 months before selling, the capital gains tax is reduced to 10%.

If you sell the property after transitioning your SMSF to the pension phase, capital gains may even be tax-free.

Can I Live in My SMSF Property?

No, you generally can’t live in a residential property owned by your SMSF. This restriction applies to you and any related parties. The ATO has strict rules in place to prevent SMSF members from gaining personal benefit from their SMSF assets before retirement.

However, there is an exception for commercial property. As a business owner, you could lease commercial property from your SMSF to use for your business, provided you pay market rent and follow SMSF rules.

Costs and Risks of SMSF Property Investment

Investing in property with your SMSF isn’t without its costs and risks. Here are some important factors to consider:

  • Setup and Compliance Costs: Setting up an SMSF and ensuring compliance with regulations can be costly and time-consuming.
  • Loan Restrictions: SMSF loans have stricter criteria, higher fees, and limited flexibility compared to regular property loans.
  • Property Market Risks: Property values can fluctuate, impacting your SMSF’s overall performance.
  • Liquidity Issues: Property is less liquid than other assets, so it can be harder to access funds quickly if needed.

It’s essential to weigh these risks and consult with financial and legal experts to ensure SMSF property investment aligns with your retirement goals.

Frequently Asked Questions

  1. Can I use my SMSF to buy an investment property?
    Yes, an SMSF can be used to buy property for investment purposes, provided it complies with SMSF regulations.
  2. Can I get a loan through my SMSF to buy property?
    Yes, SMSFs can obtain loans, but they must be structured as limited recourse borrowing arrangements, meaning the lender can only access the property, not other SMSF assets, if the loan defaults.
  3. Can I live in a property owned by my SMSF?
    No, you and any related parties are not allowed to live in a residential property owned by your SMSF. However, you can lease commercial property to your own business.
  4. How much can my SMSF borrow to buy property?
    Borrowing limits vary by lender, but generally, an SMSF can borrow up to 70-80% of the property’s value. You’ll need to cover the rest with SMSF funds.
  5. Do SMSFs pay stamp duty on property purchases?
    Yes, SMSFs are required to pay stamp duty on property purchases, just like individual buyers.

Ready to Invest with Your SMSF?

Using an SMSF to invest in property is a powerful way to build your retirement wealth, but it’s important to navigate the rules and restrictions carefully. With the right planning, you can turn your SMSF into a growth vehicle through property investment.

For those who want to learn more, we’ve also covered how to use super to buy a house. If you’re considering buying property using super, our detailed guide can help you make an informed decision.

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This is a publication of Direct Wealth Pty Ltd, a wholly owned subsidiary of Direct Wealth Group Pty Ltd.

General Advice Warning – The information contained in this article is of a general nature and does not take into account your particular objectives, financial situation or needs. You should therefore consider the appropriateness of the advice for your situation before acting on it. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decisions regarding any products or strategies mentioned in this publication.

Disclaimer – While all care has been taken in the preparation of this blog, to the maximum extent permitted by law, no warranty is given in respect of the information provided and accordingly, neither Direct Wealth nor its related bodies corporate, employees or agents shall be liable for any loss suffered arising from reliance on this information.