BUYING property through self managed super funds (SMSFs) seems to be flavour of the month, but while friends and relatives may be waxing lyrical about the benefits, there is a lot you need to understand before jumping on the bandwagon.
Last year the Australian Taxation Office clarified what is allowed and what isn’t when it comes to borrowing money to buy and maintain property with a SMSF.
People have always been able to buy property via SMSFs but what has changed in the past few years is that SMSFs can now borrow money to do so. This has meant that SMSFs are now able to make investments that they may not previously have been able to afford. Prior to 2007, funds could not borrow to invest and even after the super rules were updated to allow it, there existed some doubt about other things like whether a fund could make improvements to property.
Here's the rules
There are strict rules governing what money borrowed through an SMSF can be used for. For example, spending borrowed money on repairs and maintenance is ok, but spending borrowed money on anything deemed to be an ‘improvement’ is not allowed. While improvements to the investment property are allowed, they must be funded using other money in the SMSF (such as money from member contributions) and not any funds the SMSF has borrowed.
People need to go into the arrangement with their eyes wide open. For example, depending on whether a person would be making a taxable loss or gain with an investment property, and factoring in what their marginal tax rate is, they may be better off holding a property investment outside of super. It all comes back to looking at what’s best for the individual and their circumstances.
With something as important as the money a person hopes to retire with, it’s worthwhile researching any retirement strategy thoroughly and seeking independent advice before deciding if it’s the right choice for you.
It’s vital not only to get tax, legal and financial advice, but also to make sure that your advisers are up-to-date in this area.
Get the documentation wrong for the borrowing arrangements, for example, and you could end up paying double the stamp duty on an investment property. It really does pay to choose your advisers wisely and remember that ignoring the fine print is at your peril! It’s worth knowing that you can get in-house administration support with certain SMSF products – this can save time, money and heart-ache in the long run.
Things to weigh up
If buying property within a SMSF is something you are seriously considering, here are a few things to weigh up. As a general rule, it’s a good idea to have a SMSF in place before looking at investment properties. The process of setting up an SMSF can be lengthy , so all the time and effort put into finding the property investment of your dreams could go to waste if your ducks aren’t in a row by settlement time.
It’s important to do your research. The Australian Securities and Investment Commission (ASIC) website at www.asic.gov.au – is a good place to start. Then speak to your advisers about whether this strategy would suit your personal goals, timeframe and feelings about risk.
People must be aware of the costs associated with managing the SMSF (quite aside from the establishment costs if you don’t have an SMSF in place already) and adding a borrowing arrangement into it.
Coutts has the team to manage your purchase in self managed super fund. Therefore, if you are looking to buy a property in a self managed super fund please contact Coutts.