Complete Guide to Self-Managed Super Fund Property Investment

  • Troy BurnsTroy Burns
  • Updated Dec 19, 2022

  • Mate Checked

    This information has been reviewed by our SMSF Mates before it was published as part of our review process.

Self-managed super fund property investment can provide a range of benefits for those looking to invest for their retirement. Whether it be a residential property or commercial property, not only can it provide a solid return on investment, but it can also offer tax advantages and the potential to borrow against the property to increase returns further. However, property investment within an SMSF is not without its risks. The most important thing to remember is that you are responsible for the management of your own super fund, so it is essential to have an investment strategy and to seek professional advice before making any decisions.

What are the main considerations when buying a property in an SMSF?

If you are considering investing in property through your self-managed super fund, there is a lot to think about before making any final decisions. By taking the time to do your research and carefully assessing the market conditions in your chosen area, budgeting for costs, factoring in your time frame, having an exit strategy in place, and seeking professional advice where necessary, you can feel more confident about making informed investment decisions that will help you to achieve your retirement goals. Here are a few things to bear in mind:

  1. Research the market: As with any investment decision, it is important to do your research before committing to a self-managed super fund property investment. This means looking into the market conditions in your chosen area and assessing whether your property is likely to be in high demand. You will also need to consider things like local zoning regulations and any restrictions on the type of properties that will be allowed on the site.
  2. Budget for costs: One of the key challenges with self-managed super fund property investment is ensuring you have enough money available to cover all of the ongoing costs associated with owning and maintaining a property, such as council rates, repairs and maintenance fees insurance premiums, and so on. You should carefully budget for these expenses before purchasing your property so that you are not caught by surprise down the line.
  3. Factor in your time frame: It is important to have a realistic time frame in mind when making any investment, and this is especially true for self-managed super fund property investment. Keep in mind that it can take several years for a property to appreciate in value, so you need to be prepared to hold onto the asset for the long term if you want to see a return on your investment.
  4. Have an exit strategy: As with any investment, it is important to have an exit strategy in place before you purchase your self-managed super fund property. This will help you sell the property if it doesn’t perform as well as you had hoped or if you need to access the funds for another purpose.
  5. Seek professional advice: Finally, whether you are looking to purchase property for your self-managed super fund or any other investment, it is important to seek professional advice from a qualified financial advisor. With the right guidance and support, you can feel more confident about making well-informed investment decisions that are likely to lead to a solid return on your money over time.

What are the SMSF property rules from the Australian Taxation Office?

An SMSF, or self-managed superannuation fund, is a type of retirement fund that allows you to take more control over your investments. This can be very beneficial if you have specific investment goals or preferences in mind. However, with all the benefits and freedoms that an SMSF offers also come certain rules and regulations that must be followed in order to maintain compliance with Australian law.

One important aspect of setting up an SMSF is understanding the property rules from the Australian Taxation Office (ATO). These rules are designed to ensure that funds are used for the purpose for which they were created – retirement benefits – rather than being used as a way to gain additional wealth through real estate investments.

The fundamental rule is that an SMSF can only purchase property that will be used to provide retirement benefits for the members of the fund If an SMSF purchases a property that is not going to be used for these purposes, then the ATO may deem the purchase to be an “arms-length transaction”. This simply means that the purchase was made with the intention of making a profit, rather than for the benefit of the members of the fund.

If an SMSF is found to have engaged in an arms-length transaction, then it may be subject to penalties from the ATO. These can be quite severe and include the removal of the fund’s tax concessions.

In addition to these rules regarding property purchases, there are also other restrictions that apply to SMSFs in regards to borrowing money and lending money. In order to avoid these types of issues, it is always best to seek professional financial advice when setting up an SMSF so that your investments will comply with all applicable regulations.

How much money do I need in my SMSF to buy property?

Buying property through an SMSF in Australia has become increasingly popular in recent years, as more and more people are taking advantage of the benefits that come with this investment strategy. However, there are a number of important considerations to keep in mind when purchasing a property using your SMSF.

The first thing you need to do is check whether or not your SMSF is eligible for this type of investment. Generally speaking, only self-managed superannuation funds containing at least one member who will be living in the property can buy residential real estate. This means that if you plan on buying a residential investment property, it must be rented out by another person – rather than lived in yourself – once purchased.

Additionally, you must ensure that the property you wish to purchase adheres to the regulations set out by the ATO. For example, your SMSF can only buy one residential property as opposed to several properties in various locations – which is generally a lot cheaper than buying multiple units or houses across town.

Another important factor to consider when purchasing real estate through your SMSF is the borrowing limits for superannuation funds. If you intend on using leverage (or borrowed money) to finance the purchase of an investment property, be aware that there are strict rules in place regarding how much debt your fund can incur. According to these limitations, if your total benefit limit is $1 million and you use 95% of this amount as a loan towards purchasing a house, then only 5% or $50,000 can be used as a deposit.

Furthermore, should you decide to sell the property in the future, any profits made will need to be distributed back to your superannuation fund members – rather than being kept by you personally. Therefore, it’s important to speak with a financial advisor to ensure that buying real estate through an SMSF is the right investment strategy for your individual circumstances.

If you’re self-employed or run your own business, there are some additional benefits to be gained from purchasing property through your SMSF. For instance, any rent received from tenants will be taxed at a lower rate (15%) compared to if the income was earned outside of superannuation. What’s more, any capital gains tax on the sale of the property will also be at a lower rate (10%) – making it a very tax-effective investment strategy.

Of course, as with any significant financial decision, it’s essential to seek professional advice before proceeding with an SMSF real estate purchase. This is because there are several complex rules and regulations that need to be adhered to complete the transaction smoothly and without any issues.

What is a limited recourse borrowing arrangement or LRBA?

A limited recourse borrowing arrangement, or LRBA, is an agreement between a superannuation fund and a lender that allows the fund to borrow money for investment purposes. This type of borrowing is only permitted in the context of self-managed super funds (SMSFs) under strict conditions specified by the Australian Taxation Office (ATO).

How does an LRBA work?

An LRBA involves taking out a loan on behalf of an SMSF from either another person or entity such as a bank or other lending institution. The borrower must be either one member of the SMSF or related to all members of the fund, usually through common ancestry. Alternatively, the borrower can be a company that is wholly owned by the SMSF members. The funds borrowed under an LRBA are used to finance property purchases on behalf of the fund, with the lender’s interest in the property being registered as a mortgage.

The loan money cannot be used simply to purchase assets that would otherwise count towards the fund’s overall value, such as shares or other financial securities. Instead, it must only be used to acquire real estate assets and these must not be allowed to form more than half of the total value of all investment holdings that exist within an SMSF at any given time. In addition, for existing properties purchased through an LRBA, depreciation benefits cannot be claimed against future income tax returns. However, there are certain benefits that can be enjoyed by SMSF members who invest using an LRBA, including the ability to claim certain tax deductions and a more flexible approach toward borrowing limits.

What are the benefits of an LRBA?

One significant benefit of limited recourse borrowing arrangements is that they allow SMSF members to access additional funds that can be used for property purchases without increasing their overall debt levels. This can help investors maximise returns on investments by buying into more expensive properties than would otherwise be possible due to restrictions on the total amount that can be set aside for such purposes within a standard SMSF.

In addition, there are certain tax benefits associated with investing in real estate through an LRBA. For example, any rental income earned from the property can be offset against the loan repayments, which can help to reduce the overall cost of investment.

Can an SMSF buy residential property?

A self-managed super fund (SMSF) can buy a residential property in Australia, but there are a number of rules and regulations that must be followed.

The most important rule is that the property must be purchased for investment purposes only, and not as a principal place of residence for the SMSF members. This means that the SMSF cannot purchase a property that any of the members intend to live in, either now or in the future.

Another key rule is that the SMSF must have enough money to cover all associated costs, such as stamp duty, legal fees and so on. It is also important to note that an SMSF cannot borrow money to purchase a property; all funds must be sourced from within the SMSF, and cannot include loans from external parties.

If the property is purchased through a real estate agent, it is important to use an agent that has experience working with SMSFs so that they can help you navigate the rules and regulations involved. This will enable you to purchase a property that is suitable for your investment needs, while still adhering to all of the legal requirements.

Can my SMSF buy an overseas property?

If you’re thinking of using your self managed super fund (SMSF) to buy an overseas property, there are a few things you need to know.

Under Australian law, SMSFs can only invest in assets that are allowed by the SIS Act. While real estate is generally considered an allowable asset, there are some restrictions on investing in overseas property.

Firstly, the property must be purchased for investment purposes only – it cannot be used as a holiday home or rental property.

Secondly, the property must be acquired through an arms-length transaction – this means that it cannot be bought from a family member or friend.

Thirdly, the SMSF must comply with the prudential requirements set out by the ATO. These requirements include ensuring that the SMSF has enough assets to cover any liabilities associated with the property and that the property is insured against risks such as fire, floods and earthquakes.

Finally, it’s important to remember that an SMSF is a long-term investment vehicle – you should only consider buying an overseas property if you’re prepared to hold it for at least 10 years.

If you’re thinking of using your SMSF to buy an overseas property, make sure you understand the rules and regulations before making any decisions.

What is the sole purpose test?

The sole purpose test ensures that SMSFs are being used as a retirement savings fund, and not for any other purposes and it applies to everyone who wants to set up an SMSF – you must demonstrate that the fund will only be used to provide retirement benefits for its members. If your SMSF fails the sole purpose test, it could be declared non-complying and lose its concessional tax treatment.

To meet the requirements, there are several key factors that you need to consider. These include:

  1. Membership requirements – In order to be eligible to join an SMSF, you must have at least two members. All members of an SMSF must be trustees or directors of the corporate trustee.
  2. Contributions – Contributions made to an SMSF are taxed at a concessional rate, and are generally limited to $25,000 per financial year.
  3. Benefits paid – Benefits can only be paid from an SMSF when a member reaches preservation age and retires, or if they meet one of the other conditions of release.
  4. Investment strategy – An SMSF must have an investment strategy in place that is consistent with the sole purpose test. The investment strategy must take into account factors such as risk, return, diversification and liquidity.
  5. Winding up – An SMSF must be wound up when the last member reaches preservation age and pension phase and retires or if it becomes non-complying.

If you are considering setting up an SMSF, it is important to understand the sole purpose test and what is required in order to meet this requirement. By working closely with your SMSF accountant or financial advisor and carefully planning your retirement savings strategy, you can ensure that your SMSF meets the sole purpose test and gives you peace of mind for a secure financial future.

General Advice Warning

Troy Burns

Non-Correlated Capital

Troy has more than 15 years investment and fund management experience, including management of hedge funds and multi-strategy funds. Troy has raised and managed over 300 million dollars in investments and has engaged and serviced over 150 high-net-worth clients for Non-Correlated Capital, the investment company which he serves as CEO and Portfolio Manager. Based out of Perth, Western Australia, Troy is one of the founders of SMSF Mate.

Troy’s educational qualifications include a Masters of Business Administration, Masters of Applied Finance, and Advanced Diploma, Financial Markets, completed at Charles Sturt University. Troy has also previously worked as a derivatives trader and the managing director of a civil engineering company.

You can find out more about Troy or connect with him on Linkedin here:

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  • SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!

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