Many people wonder if they can use their super account to finance a home purchase, but they might not realise that there is a distinction between traditional super account and self-managed super funds. Previously, we’ve covered what a Self-Managed Superannuation Fund (SMSF) is and how it allows Australians more control and flexibility over their retirement assets in this country.
Table of Contents
What is a Super Account?
To put it simply, it refers to the amount of money that an employee’s company sets aside for their retirement over the course of your employment. This account will be used to help out the retiree in question financially. Moreover, the amount of your contributions to your retirement fund is taken out of each paycheck at a rate that has already been decided.
How do I use it to purchase property?
To be eligible in purchasing a property with your SMSF, your property are required to satisfy certain rules:
- comply with the “sole purpose test” of being used exclusively for the purpose of providing retirement benefits to members of the fund
- not being owned by any member of the fund or any person related to a member of the fund
- not being used as a main home by any member of the fund or anyone who is related to a member of the fund.
- not be rented to any member of the Fund or any affiliate of the Fund, excluding the commercial property
Benefits of buying property through super account:
- Tax advantage: SMSF funds require you to pay 15% tax on rental income, but once a property has been held for more than 12 months, the funds get a one-third discount, which lowers capital gain tax. Also, if you bought the property with a loan, you can use the money to deduct the interest you paid on the loan. If you spend more than you make, the difference will be carried over to the next year as a loss that you can write off.
- Business benefits: In contrast to residential property, commercial property allows you to rent it back back to the your close relatives. Commercial real estate includes buildings like stores, offices, and warehouses that businesses use. Most of the time, the rent paid by the tenants of commercial properties is a steady source of income for the SMSF. It is a good way to spread out your investments and get a steady flow of money!
- Reduced capital gain tax: SMSFs that are eligible for the CGT discount can get a 10% discount on your capital gains if you have owned the asset for over a year.
- Greater personal control over investment strategy
The risks of using superannuation to buy property:
- No personal benefits: You won’t be allowed to rent out a residential property to someone of close relative to you. In other words, you won’t be able to use your SMSF to buy a home for the purpose of your child to live in. However, you can sell it but, it has to be in market price.
- High costs: Setting up a self-managed superannuation fund (SMSF) to buy real estate will cost more than buying it with cash, especially if an LBRA (legal recourse borrowing agreement) is included. Furthermore, SMSFs requires you to have a trained and registered tax agent do your annual tax return and audit. Note, this is an extra cost that should be taken into account.
How should I minimise my risk?
- Diversify your risks: To do so, you can spread the risk of your SMSF property portfolio by investing in residential, commercial, and industrial properties, among others as well as purchasing a real estate in more than one market.
- Conduct due diligence: This includes looking into the property’s location, marketability, and possibilities for financial gain. Property management fees, insurance premiums, and routine maintenance are just some of the outlays that should be factored into the equation.
- Seek expert advice from qualified professionals: Seek professional financial advisors, real estate agents, or mortgage brokers can to help you understand the complexities of SMSF property investment (smsf audit services) and give you personalised advice to help you reach your financial goals.
SMSF property investment pitfalls to avoid:
- Over-reliance on a single investment: ensure you invest your money in more than one property, that way you can diversify your risks.
- Failing to meet compliance requirements
- Failure to lodge your SMSF in due
Get In Touch
Mint Super Audit is an independent SMSF industry leader in assisting clients through the complex world of SMSFs by offering specialised services from knowledgeable SMSF auditors and individualised solutions. So, you can count on our full support if you’re considering about using your SMSF to make an investment in real estate. If this is something you’re interested in doing.
Feel free to step into our office in Cheltenham or set up an online smsf audit service through our page.