Since early 2007, investors have had the ability to leverage their superannuation directly into property. Using an SMSF has been a popular and attractive tool to reduce risk and volatility, and improve returns. More investors are using their Self-Managed Super Fund (SMSF) as a vehicle for property investment, particularly Baby Boomers. The consistent wave of ageing Baby Boomers projects a change in focus for the superannuation industry, from wealth accumulation, to maximizing income in retirement. SMSFs currently account for approximately 32% of all superannuation funds, which is the largest individual segment; above industry, retail and other sectors.
In light of this, here are 5 areas to consider when using SMSF to invest in property.
A Self-Managed Super Fund (SMSF) can be used to borrow money for the following reasons:
– Purchasing a property
– Paying for maintenance and repairs
– To capitalize interest.
You cannot use borrowed funds to improve the property – an improvement being an addition, extension, or granny flat. Improvements should be made using the cash resources of the fund. When debt is used, the property must be held in a Holding Trust with a Corporate Trustee and not directly in the SMSF. For the purpose of mitigating risk and keeping track, it is critical to keep good records in your SMSF to identify whether borrowed funds or internal cash was used.
It is important to know the difference between a repair and an improvement, for the purposes of superannuation borrowing legislation. If a renovation is being conducted, it is considered a repair, and borrowed funds can be used to complete task. If an improvement if being conducted, internal SMSF cash must be used. Conducting a renovation – that is; merely returning the building-component back to a new condition – is classified as a repair. A common mistake here, is to improve a component of the property using borrowed funds; for example – the kitchen. If the bench area is extended, or if a wall is knocked down, this is deemed to be an improvement, and internal SMSF cash must be used. If the existing kitchen is replaced with a cosmetic kitchen, this is allowable, and borrowed funds can be used.
3. Stamp Duty
When the debt is paid down, the corresponding property must be transferred from the holding trust into the SMSF. Various states will charge a second stamp duty at the full property transfer rate, so additional documentation used at the initial time of purchase will save you from a second stamp duty trap.
4. Life Insurance
Life insurance premiums are tax deductible in super. A common mistake is assuming that if a member of the SMSF dies (where policy is taken out to repay debt), life insurance premiums are still tax deductible. This is not the case. For the premium to remain tax deductible, it must not relate to the specific use of paying down debt.
5. An associated party loan
This occurs when an investor has used external funds to assist them in purchasing a property in their SMSF, by contributing funds as a contribution (non-concessional). The issue here is that once contributed, these funds are inaccessible until retirement and, you can’t put in sufficient funds within the allowable limits. A simple fix, is to lend the funds to your superannuation which allows its release if refinanced and there is no limit on the amount of the loan. The loan agreement must meet the limited recourse borrowing requirements of the legislation as well as clearly identifying all terms and conditions.
If you would like to know more about the ‘ins and outs’ of using an SMSF to invest in property, be sure to book an appointment with one of our property investment specialists. At Calla Property, we help you to Build Your Dreams, by helping you to find the best investment property for your investment goals. Secure an appointment slot by clicking below and booking a ‘Discovery Session’.
For further information and to secure an appointment, book a Discovery Session below.