While using super to buy property is strictly regulated in Australia, one of the legal ways to do so is through an SMSF – but what does the process involve?
First introduced as a means to take the pressure off aged pension benefits, the concept of superannuation was designed to provide a financial buffer for employees when they transition into retirement, and was made compulsory in 1992 by the Labor Government and spearheaded by then Prime Minister, Paul Keating.
As a general rule, if you are a legal adult, earn more than $450 before tax per month, and are regarded as an employee for tax purposes, your employer must pay money into a super account in your name, which is then managed by a super fund of your choice.
However, superannuation has undergone some pretty significant reforms since it was first rolled out, and approximately one third of all superannuation funds are now self managed. With an ageing population, many Aussies can see the light at the end of the working tunnel. By taking charge of their own financial future, members of SMSFs are also using super to buy property in droves.
How To Buy Property Through A SMSF
When you make the conscious choice to manage your own super via an SMSF, you take on the responsibility that would normally be taken care of by a retail or industry superannuation fund. One of the major points of difference between the two is that if you’re in the process of setting up a self managed super fund, the fate of your finances is ultimately in your own hands.
All SMSFs have their own Tax File Number (TFN), Australian Business Number (ABN) and transactional bank account, which allows them to receive contributions and rollovers, make investments and pay out lump sums and pensions.
As such, many SMSF members have long been using super to buy property as a long term investment strategy. When compared to shares or other stock choices, the right types of real estate purchases offer some pretty promising capital growth.
As of 2019, the ATO reported that the total estimated value of the assets held by SMSFs was $748 million, with listed shares making up 31% of this number, followed by cash and term deposits (21%). While property only makes up around 13%, it can be a viable asset to include in any SMSF portfolio as a means to diversify the investments.
If you have a SMSF, you can use money from your fund as a deposit to purchase a residential or commercial investment-only property as part of your investment strategy for retirement. However, there are very strict rules relating to borrowing from an SMSF, and failure to follow them exposes the SMSF to potential breaches, fines and penalties.
As a SMSF borrower, you may also be subject to higher interest rates, and lenders might not be prepared to finance the full price of the property. Questions of liquidity and tax losses are also worth looking into, you must make any repayments from your super fund, and losses from the property can’t be offset against your taxable income outside the fund. In addition, you can’t do anything to the property that changes its character until the SMSF loan is fully paid off.
As a general rule, commercial infrastructure is usually the popular choice for those using super to buy property. The benefits associated with commercial property investment include higher rents, the fact that leases are often much longer periods of time, the application of GST, and that maintenance, rates and insurance costs are often paid for by the lessee.
Using super to buy property is heavily regulated in Australia, and should not be approached lightly. Before embarking on your SMSF property journey, it’s worth consulting a reputable mortgage broker to ensure your loan terms are as favourable as they can be, and that your short term actions match your long term financial goals.
Partnering With Home Loan Professionals
Navigating the complex world of home loans has long been regarded as stressful, frustrating and time consuming – but if you can find the right advice on sourcing how mortgages work, then the good news is that it doesn’t have to be.
Since their inception in 2012, the team at Madd Loans have worked tirelessly in providing over 2,000 Queenslanders with finance options to help turn their dreams into reality. With the entire brand being built on referrals, owner George Samios takes great pride in making the loan process both fun, educational and stress free – and he has a swag of awards to prove it.If thinking about your financial future strikes a chord with you, then it might be time to speak to a professional. Whether you’re chasing mortgage solutions or a financial fairy godmother, the team at Madd work together as a collective to turn your goals into reality.
