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The idea of purchasing a property via your super fund may seem like an ideal step in increasing your retirement fund as well as diversifying your investments. However, it is also one of the places that is patrolled by the Australian Taxation Office (ATO), and the fine print is not easily navigated. You will be free to buy a second property using your self managed super fund (SMSF) but you must know what is legal, what is not and how to be on the right side of the law. We will unpack the process step by step to enable you to make confident and informed decisions.
Superannuation is meant to finance your retirement and not your retirement spending spurt. But in special circumstances SMSFs are allowed to invest in property as a means of accumulating long-term wealth. The trick is that the property you buy with your SMSF should be something that contributes directly to your retirement, and not the lifestyle you now lead. That is to say that you cannot convert the property to your home, a house of holidays, or even allow your family to live in it.
Your SMSF is perceived by ATO as an independent entity and has its own financial interests. Having such a point of view in mind will make you one step closer to making the right choices.
The two properties that an SMSF can buy are residential and commercial. Home ownership entails a lot more limitations because you cannot reside or rent it to your family members. Commercial property however, is more flexible- the owners of the business will tend to utilize their SMSF to acquire their own premises and then rent it back to their own business at the market rate.
Even before you ever begin to look at listings, your SMSF must satisfy certain criteria: it must be compatible with ATO requirements, the trust deed must permit purchasing of property, and have sufficient funds not only to purchase the property but also to maintain it, insure it, and to continue running it.
An effective plan will make sure that your investment is in line with the end objective of the fund, namely, increasing your retirement savings, by a long and sustainable growth in property wealth.
In case your SMSF does not have sufficient amounts of cash to purchase a property outright, you may consider a Limited Recourse Borrowing Arrangement (LRBA). The arrangement means that your super fund can take the loan to purchase a property and the lender can only recover the loan by selling that particular property.
This is where SMSF property loans are introduced. Such loans are not arranged in the same way as a home loan and may have a larger deposit requirement - maybe over 20 to 30 percent. Although the lending environment is stricter, LRBAs can be a significant growth tool provided that it is used appropriately. The snag: you are required to make all repayments and other related rates directly out of your SMSF, as opposed to your personal bank account.
Violating this rule may result in severe punishment, so there is a strong necessity to make a strict distinction between personal finances and SMSF finances.
Majority of the compliance concerns occur when the investors cross the boundary between personal gain and super fund best interest. An example is that you cannot get a second house using your super and rent it to yourself, your children or your business unless it is commercial property used on an arm-length basis.
Renovations are also problematic. Even in the case of the maintenance, one is not allowed to make some major improvements such as construction of an additional bedroom or any major alteration to the structure in case the property is being held under a loan arrangement. It is a no-brainer that further borrowing or utilizing super funds on personal improvement is not in line with the intent of the SMSF.
You also have to make sure that the property deal is made at arms-length, that is, all transactions are done at market value. The ATO rules can be violated through overpaying or underpaying, or non-conformity to below-market leases.
By investing in the right way, utilizing your super to buy property can have your investment plan come to fruition faster without losing sight of your long-term retirement investment goal. The risk of property is relatively lower compared to shares, as it provides a consistent rental income and a chance to increase the value of property in the long term. To the majority of Australians, the reality of physical investments in the form of bricks and mortar comes in handy and gives one the feeling of having control over their financial future.
However, property does not seem to be a shortcut to prosperity. Super funds are limited in liquidity; the property being sold may have to take time and you have to ensure that there is sufficient cash flow available in your fund to cover the current needs such as insurance payments, auditing payments and pension payments. When your SMSF is over-exposed to a given property, you lose diversification, which is one of the safeguards against the bad times.
Prior to you buying a second property using your SMSF, step back there and review your overall investment plan. Make certain that the new purchase fits within the objectives of your fund and the risk profile. At this stage, it is important to seek professional advice. The assessment of the borrowing capacity, returns, and compliance risks can be done through a licensed financial adviser or SMSF specialist.
The plan of the cash flow should also be drawn out by you. The properties in super funds lack flexibility as compared to those owned personally and failure to handle the rental income or expenses can threaten the compliance. By investing in property along with other balanced investments such as shares or managed funds, you will be able to stay stable and diversified in the long run.
When you want to purchase a commercial property, you need to know how it will work for your business and the aim of your retirement without stepping into any of the realms of violation of the law. It can be a clever idea to lease your business premises to your SMSF at market rates provided that this is put in place in a proper way.
It is a fantastic idea to use your super fund to purchase the second property, though it should be done in a strategic and legal way. With the right financial advice and by comprehending the ATO regulations, doing everything above board and keeping everything in lawful ways, you will be able to expand your portfolio by adding more properties to your SMSF.
To begin with, assuming you are serious about developing your financial future, you can start by reviewing your SMSF strategy, seek advice with a qualified advisor and research the loan options available that are designed specifically to invest in super. It takes a few right pointers and what begins as a single purchase can transform into a strong basis of long-term wealth of property.
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