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15-Oct-2020 By - team

Could you manage an SMSF Property?

Using a self-managed super fund (SMSF) to buy property is becoming increasingly popular, but acquiring property through your SMSF requires careful consideration.

You have to ensure it supports your overall investment strategy and avoids unnecessary risk.

One of the unique characteristics of self-managed superannuation funds (SMSFs), which make them attractive to some investors, is their ability to invest in direct property. A significant number of SMSFs do invest in natural stuff, and statistics from Class Limited showed this to be as high as 27.1% in 2016. This includes both residential and non-residential (i.e. commercial property).

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What Is A Self Managed Super Fund (SMSF)?

Of the SMSFs that do invest in property, approximately half of the fund is invested in that stuff – 47% for residential and 51% for non-residential.

However, the reality of investing in property is that it is quite complicated and should never be considered as an easy way to enter the property market.

A self-managed super fund (SMSF) is a savings account for your retirement that you manage yourself, rather than one that’s managed by a superannuation provider.

The do-it-yourself super method allows you to be more closely involved with what you invest in and offers tax benefits that significant providers do not.

However, it comes with a lot more responsibility, as you are in control and must make sure everything is set up and managed correctly.

Demanding a lot of energy and research, SMSFs aren’t suitable for everyone. Some people thrive under the added responsibility, while others struggle.

An SMSF is a private superannuation fund that you manage yourself, rather than one that’s managed by a superannuation provider such as ‘Australian Super’ or ‘QSuper’.

It can have up to four members, all of whom must be a trustee. This means that each member of the fund is equally responsible for decisions made about the fund and the fund’s compliance with relevant laws.

A trustee should also:

  • Follow an investment strategy that doesn’t exceed your risk tolerance and will meet your retirement needs
  • Have the financial experience to make investment decisions,
  • Keep comprehensive records for audits
  • Organise insurance for fund members


Superannuation is basically a savings account for your retirement – one which your employer legally must make deposits into and you can’t touch until you reach a ‘preservation age’, which is between 55 and 60 depending on when you were born.

The purpose of an SMSF is to give yourself more control over your super; how much you pay into it, and where and how much of it is invested. In theory, it sounds like a no brainer, but SMSFs are a massive responsibility to take on and require a large amount of time and effort.

Additionally, they come with a large number of expenses, through charges, as well as the cost of hiring professionals like accountants to assist you in the process.

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Investing in Property within your SMSF

Direct property investment remains a popular investment option for self-managed super fund (SMSF) investors. But it requires careful consideration before taking action. Other property asset classes may help SMSF investors achieve the same outcome but in a better way.

One of the most appealing features of SMSFs is the control trustees, and members can exercise over their investment choices. Property is the third most popular asset class for SMSFs and an asset class that most investors are familiar with.

However, investing within an SMSF poses a specific set of risks, rules and possible outcomes, which should prompt trustees to compare the risk, return and tax scenarios of all the different types of property investment vehicles available to them – including direct property investments, unlisted funds, and trusts.


SMSFs And Direct Property Investment

Superannuation funds have always been able to invest directly in property, but historically many SMSFs didn’t have sufficient funds to do so. The introduction of limited recourse borrowing arrangements (LRBA) in 2007 put direct property investment within reach of many more SMSF investors by allowing them to borrow funds to purchase assets within their fund.

Since then, SMSF borrowing has gained momentum, reaching $25.4 billion in 2016 (the latest dates for which we have figures) with 93% of that borrowing being invested in real property assets. However, if borrowing through an LRBA, an additional level of cost and regulation can be added to the fund and its assets.

Whether investing in direct property within your SMSF via lending or accumulated capital, the investment should be evaluated for its suitability based on characteristics such as diversification, liquidity, management and cash flow. Most important is the investment’s potential to contribute to the main purpose of superannuation, to provide an income in retirement.


Self-managed Super Fund Property Rules

You can only buy a property through your SMSF if you comply with the rules.

The property must:

  • meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
  • not be acquired from a related party of a member
  • not be lived in by a fund member or any fund members’ related parties
  • not be rented by a fund member or any fund members’ related parties


If your SMSF purchases commercial premises, it can be leased to a fund member for their business. However, it must be leased at the market rate and follow specific rules.

When you become a client of ESUPERFUND, you are permitted to invest in Residential and Commercial Property for your SMSF. Concerning investing in property for your SMSF, there are very specific rules and regulations that must be adhered to, and we strongly suggest that you familiarise yourself with them when contemplating purchasing property for your SMSF.

Investing in the property market using a self-managed fund allows you to dabble in all kinds of property, including residential, commercial and industrial.

However, you need to consider what is the best property class for you and abide by the rules.

Any property you invest in must:

  • pass the ‘sole purpose test’ meaning it is maintained for the purpose of retirement benefits for its members
  • not be lived in by a person or entity related to the member
  • cannot be bought from a related party
  • is not rented by a person or entity related to a fund member.


Can you use your Self Managed Super Fund (SMSF) to buy a property?

SMSFs can be used to buy investment properties and have become an increasingly popular choice for Australians in recent years.

A self-managed fund can even use borrowed monies to purchase a single asset or a collection of identical assets that have the same market value.

This is often done through Limited Recourse Borrowing Arrangements (LRBA), which are driving the popularity of property purchases in SMSFs.

This specific method involves the SMSF trustees receiving the beneficial interest in the purchased asset, while the legal ownership is held on trust.

The upside is that, with an LRBA, your whole super fund is not at risk if the loan defaults. There are also restrictions on the way a debtor can recover their funds.

The SMSF might adopt a single asset strategy if the asset proposed to be invested in is considered by the trustee to satisfy the Investment Objectives and provided that the Trustees have considered the relevant Concentration Risk. By law, SMSF trustees must have an investment strategy which has regard to diversification. Investment decisions are a matter for SMSF trustees, and it may be prudent to seek financial advice.

An SMSF can be used to buy a residential property but there are several restrictions associated with doing so.

Below are some of these restrictions:

  • A trustee or anyone related to the trustee, cannot live in a residential property that you have purchased through the SMSF
  • A trustee or anyone related to the trustee, cannot rent the property purchased through the SMSF
  • The SMSF cannot buy a property owned by a trustee or anyone related to the trustee
  • The purchase must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members


The object of the sole purpose test is to ensure that the SMSF is used for the sole purpose of providing benefits to members upon their retirement or their dependants in the case of the member’s death before retirement. It’s essentially the golden rule of SMSF property investment.

Besides, you can’t absorb an existing residential home that a trustee owns into the SMSF by purchasing it.

It’s also important to note that purchasing a property with funds from the SMSF is very different from purchasing one with an SMSF home loan. That’s an entirely different and more complex kettle of fish which we’ll get into later.

Commercial property is generally more popular with SMSF investors than residential property.

Buying commercial property through an SMSF is still bound by the same restrictions as buying residential property, such as the sole purpose test.

However, it’s common-place that small and medium-sized enterprises (SMEs) will buy a commercial property through an SMSF and lease it back to themselves by paying rent to the SMSF.

This is legal provided it is maintained on an ‘arm’s length basis’. This basically means that all investments should be managed on a strictly commercial basis, with the assets reflecting their true market value.

As well as the sole purpose test, there are several other conditions that you need to follow if you’re considering this:

  • The terms of the lease must be commercially competitive and/or market value. You can’t give your business mates rates and lease the property for way less than its worth to yourself to save yourself money.
  • You’re required to get regular valuations on the property to ensure the rent you’re paying is the appropriate market value.
  • You must pay your rent on time, in full, every time. You can’t pay a day or two late because you had a less than successful week, just like in any other rental agreement.


Failure to follow these conditions will result in your lease not being compliant. SMSFs are monitored by the ATO which regularly audits them to ensure you are compliant, so it’s not worth flouting the rules. Additionally, you’re required to audit yourself annually.


What Are SMSF Property Investments?

A Self Managed Super Fund (SMSF) is one of Australia’s fastest-growing, most popular and successful investment options, as it allows investors to take full control of their own investment choices. It allows investors to have independence and flexibility to drive their own investment decisions, capital return, growth strategies and performance.

As a leading investment firm with an unrivalled track record of positive investment performance, Sentinel Property Group offers a range of services including catering specifically for Self Managed Super Funds property investment.

Sentinel investors receive dependable monthly returns paid purely from rental income from its properties. As well as these monthly returns, Sentinel investors also receive special capital return payments on revaluations and capital growth returns on divestment. This is a highly attractive and sought-after combination for anyone looking at investing super in the property.

The whole point of Self Managed Super Fund property investment is to have greater control over your own investment growth strategies. It is therefore important for investors to thoroughly research all the different options available, and make sure that their chosen investments deliver more than the widely accepted mediocre returns that far too many investors are too readily accepted as ‘the norm’.

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The advantages of SMSF property investment

One of the biggest benefits of SMSF investment is that you can use it to invest in property, including commercial property directly. Investing in Property through SMSF is an excellent way of achieving your desired investment property goals while increasing retirement savings with positive long-term returns and capital growth.

The tax advantages of property investment through SMSF are also attractive in that the maximum tax you will have to pay for rental income is 15%, and if your SMSF is provided in the pension phase, you will not have to pay the tax at all.


Other advantages and benefits of an SMSF commercial property investment include:

  • Gaining a degree of control of your investments and superannuation that is only available through a super fund investment property
  • Buying and renting back your SMSF commercial property investment
  • Accomplishing diversity within your SMSF

When using a Self Managed Super Fund to buy property, the investment goals of regular returns, future capital growth, and tax minimisation should always be top of mind for investors. Maximising returns and growth should be the main focus of property investment through SMSF.

Through Sentinel, SMSF commercial property investors can enjoy direct investment in a range of high-quality commercial properties, which will deliver dependable monthly returns, additional capital returns, capital growth, and best of all you don’t have to manage the property yourself.


Don’t have enough savings in super?

If you’re looking for a way to buy a residential property, but your super fund doesn’t have enough money, or you don’t want to go through an LRBA, there’s another option you can explore.

A Tenants In Common (TIC) arrangement would allow you to split the borrowing across your family home and your super fund.

For example, if the property you want to buy is $400,000, with a TIC, you could borrow $200,000 against your family home and use $200,000 from your super fund.


Property developers and SMSFs

Property developers must have an AFS licence to provide financial planning advice. This includes advice on setting up an SMSF.

Property developers may have a pre-existing business relationship with the professionals they recommended. They may receive a referral fee or other benefits that could amount to thousands of dollars.

Don’t be pressured into making property purchase decisions for an SMSF. Watch out for sales tactics like competitions, free flights to sales meetings or being taken out for free meals.

Think twice about investing in property markets you are not familiar with. Do your own research first.


What An SMSF Property Can Cost You

SMSF property sales may have many charges. These fees can add up and will reduce your super balance.

Find out all the costs before signing up. Costs include:

  • upfront fees
  • legal fees
  • advice fees
  • stamp duty
  • ongoing property management fees
  • bank fees


Be wary of fees charged by groups of advisers who recommended each other’s services. It is important to get independent advice. Anyone who gives advice on an SMSF must have an Australian financial services (AFS) licence. ASIC Connect’s Professional Registers will tell you if the company or person holds an AFS licence.

See property investment for more information.


SMSF Borrowing

Borrowing or gearing your super into property involved very strict borrowing conditions. It’s called a ‘limited recourse borrowing arrangement’. You can only purchase a single asset with a limited recourse borrowing arrangement—for example, a residential or commercial property.

You should assess whether the investment is consistent with the investment strategy and risk profile of the fund.

Geared SMSF property risks include:

  • Higher costs – SMSF property loans tend to be more costly than other property loans.
  • Cash flow – loan repayments must come from your SMSF. Your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
  • Hard to cancel – If your SMSF property loan documents and contract aren’t set up correctly, you can’t unwind the arrangement. You may have to sell the property, potentially causing substantial losses to the SMSF.
  • Possible tax losses – You can’t offset tax losses from the property against your taxable income outside the fund.
  • No alterations to the Property – You can’t make alterations that change the character of the property until you pay off the SMSF property loan.


Guest post by : team Form -

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