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A self-managed superannuation fund (SMSF) is a vehicle that can be used to manage retirement savings on behalf of its members. SMSF’s are established for the sole purpose of providing more financial flexibility and expanding on your funds to help secure your retirement. SMSF’s are becoming increasingly popular due to the increase in property investment in Australia. However, if you are considering purchasing property with your SMSF, you should carefully consider your overall investment strategy. Here are some important factors to consider:

1. SMSF gives you the opportunity to buy properties.

Most of us do not have access to your superannuation fund until the day we retire; however with a SMSF, you can use the funds to purchase a property as an alternative to shares or managed funds for example. It is important to remember, however that the ownership of the asset is held in the super fund name.

It is important that you take the right steps and speak with your financial advisor or accountant before deciding to use your SMSF to invest in property, as it can be very costly should the wrong structures be put in place. Aside from the initial fees and charges, you also have to ensure that your fund has enough money for the running costs of the property.

2. You get tax benefits on your investments.

One of the main advantages of investing in property through your SMSF is the generous tax breaks that the government offers to SMSF holders. If you’re renting out the property, the tax rate on your rental income is capped at 15 per cent, which is significantly lower than the 46.5 per cent cap on personally held properties.

Meanwhile, the capital gains tax (CGT) is also capped at the marginal rate of the fund if you sell it before the fund enters pension phase, and you’ve owned the property for at least 12 months. Now, if the SMSF is already in pension phase, the taxes on your rental income and the CGT will be zero. Your Launch Finance Broker can refer you to an accountant who is qualified to advise you of these tax benefits when discussing your SMSF investment.

3. You’re limited on the types of investments that you’re able to make.

There are many advantages of investing in property through your SMSF, however there are also strict limitations on what types of properties you can purchase. The sole purpose of a superannuation fund is to fund your retirement, thus, the government has made certain steps to ensure that you invest your fund wisely.

One safeguard is that you’re only allowed to buy a property solely for investment purposes. This means you or any family members cannot live in the property, it must be rented out as an “arm’s length” investment. In addition, the SMSF trustees can’t buy a property from their relatives.

4. What if I don’t have enough savings in my super?

If you are thinking that investing in property through a SMSF sounds like a good idea, there are options. You could go down the path of Limited Recourse Borrowing Arrangements (LRBA), which allows you to borrow money to purchase a single asset, or a collection of identical assets that have the same value market. The SMSF trustees receive the beneficial interest on the purchased asset, but the legal ownership of the asset is held on trust (the holding trust).

As with everything, investing in property through an SMSF has its benefits if done properly and downfalls if you receive the wrong advice or establish the wrong structures. At Launch Finance, our brokers are knowledgeable and experienced in their field and they can refer you to fully qualified and experienced SMSF specialists to ensure you receive the best financial and tax advice.

Your retirement is not something you want to take lightly, so book a free consultation with one of our advisors today and start planning for your future and maximising your retirement funds through SMSF property investments.

Written by Duncan McKinnon