Property in super for the long-term

Borrowing to invest in property within the tax-friendly superannuation environment first became legal in 2007. Since then, Australian SMSF balances have grown to a whopping $1.5 trillion.

One of the reasons SMSFs are so popular is that your superannuation balance can be used as a deposit when borrowing money to purchase property.

We can check that purchasing property inside super is a good fit for your specific circumstances. We can also arrange every part of the process, including establishing the fund, rolling over benefits, arranging finance, sourcing the property, implementing the insurance and estate planning requirements, and performing the annual audits and tax returns. We’ll make sure your SMSF works for you.

If the correct financial analysis is performed, and an appropriate property is acquired, there should be no need to ever subsidise the investment from your own pocket. In this way, property in super is a long-term, set-and-forget strategy.

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A typical property in SMSF scenario

A husband and wife who share the same long-term investment objectives decide to combine their super balances. One person has $90,000 in two different retail funds and the other has $60,000 in an industry fund. They establish an SMSF and an appropriate trustee structure, then roll their entire balance from all three funds into the new SMSF.

The couple then uses $80,000 of their super as a 20% deposit on a $400,000 residential property. Another $20,000 is used from the SMSF to cover stamp duty and other purchase costs. They borrow $320,000 from a bank to complete the property purchase. The SMSF will still contain $50,000 that wasn’t used for the purchase. This $50,000 can be held in a combination of shares and cash investments, providing liquidity and diversification to the portfolio.

Free SMSF Consultation

Up to 2-hour free consultation to explain everything involved in setting up and running an SMSF, including investment strategy, insurance obligations, and trustee structure.

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Purchasing a property with an SMSF

When you purchase property inside an SMSF, the bank lends money under a limited recourse borrowing arrangement. This means that the loan is secured only by the property that was purchased. The lender does not have access to the balance of your superannuation in your SMSF.

These arrangements are quite secure from the lender’s perspective, as the overall strategy is usually positively geared. This means that the SMSF receives regular payments from rental income, superannuation guarantee (SG) contributions (currently 9.5% paid by your employer), any additional salary sacrifices you may choose to make, and the income earned by your cash and share investments. All ongoing property expenses, including the interest on the new loan, are paid from the SMSF.

Ready to use your super to invest in property?

There’s value in seeking advice early on, even if it’s over the phone. If you have questions call:

How to buy property in super

Stephen Vick (Director of Nexus Private Wealth Management) discusses the distinct advantages of holding property within super and explains how you can purchase property with your superannuation.

A proper financial analysis, combined with the appropriate property purchase, should ensure that you never have to subsidise a property investment in an SMSF.

There are also many other benefits to this strategy, such as:

  • The property deposit and all acquisition costs are paid using pre-tax super monies.
  • All rental income received is taxed at 15%, not at your personal marginal tax rate.
  • Capital gains tax is reduced to 10% if the property is held for more than 12 months (and to zero if the property is held to retirement then converted to an account-based pension).
  • Direct property investment can provide diversification and reduce the overall risk to your superannuation portfolio.
  • When purchasing property within an SMSF, there are no margin calls requiring you to deposit further cash.
  • You can pool your balances with relatives (up to a maximum of four members) and increase your leveraging and purchase options.
  • There’s no limit on the number of properties you can acquire within the fund.
  • You have control over everything that’s invested within the SMSF.
  • You can sell the assets when the timing suits you and minimise your tax liability.
  • In the event of your death, the distribution of assets can be structured in a tax-effective manner and the benefits distributed without fear of contest.
  • You can pay your insurance premiums (life, income protection, and total and permanent disability) with your super monies.

If you’re planning to purchase property inside super there are some things to consider:

  • Not all banks provide limited recourse borrowing arrangements.
  • The lender’s serviceability criteria will differ from a standard property purchase outside of super.
  • Not all properties can be purchased within an SMSF, so the number of suitable properties is smaller than the general investment property market.
  • The lending arrangements, the trustee structure, the type of property, the taxation implications, and the overall cash flow position of the SMSF all have an affect on each other and should be considered before purchasing a property.
  • The sole purpose of the SMSF is to provide for your retirement, so fringe benefits such as purchasing a property from a related party or using the property as a holiday home are not allowed.
  • The cost of running an SMSF can be greater than or less than the overall running cost of a retail or industry fund, depending on the size of the fund and the overall investment composition.
  • The acquisition costs of a property can represent a larger total management cost than that of holding shares. This is usually reversed over time.
  • As with all superannuation investments, you cannot access the fund for personal use until you meet a condition of release.
  • The SMSF must be audited annually. The cost of this can be reduced with simplified reporting approaches.
  • The SMSF trust deed must allow for borrowing within the fund and contain a documented investment strategy.
  • The SMSF trustees must consider appropriate insurances as part of the investment strategy.
There are many obligations and responsibilities for trustees of an SMSF. Significant criminal and financial penalties may apply if you don’t meet these.

Professional advice

Professional advice from a qualified financial advisor can give you peace of mind that you’ve got everything covered. The team at Nexus are specialists in SMSF strategies and investment property acquisition.

Choosing the right property

We can assess the appropriateness of purchasing property inside super for your specific circumstances. We can also coordinate every part of the process, from establishing the fund, rolling over benefits, arranging finance and sourcing the property through to implementing the insurance and estate planning requirements. Our long-term approach will support you from the strategy establishment process through to the ongoing supervision and performance reviews.

What our clients say…

As a small business owner, Nexus has helped me diversify my financial portfolio to enable me to create wealth outside my business, giving me added financial security for the long term. Their advice has been invaluable and I recommend their services to anyone who wants to build wealth and enhance their financial position.

We just wanted to take this opportunity to personally thank you and your team for your great work sorting out our financial situation, and in particular the ease of management and peace of mind you have given us. The level of service and attention to detail has been excellent. We now have direction and a clear vision of our finances, confident they are structured in the best possible way.

I just wanted to say a big thank you to yourself and your team. As we discussed we have found that everyone involved has been extremely personable, friendly and highly knowledgeable in their area. At no point have we felt pushed into anything and we have felt supported 100% of the way.

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