SMSF property investment: the 7 most common questions, answered - part two

The Australian Self-Managed Superannuation Fund market forecast is at 5% annual growth with more and more Australians choosing to take control of their retirement investment portfolios. SMSFs are unique in that you have the ability to invest in property. In fact, according to 2018 ATO data, property investment makes up more than 15% across all asset classes in SMSF investing.

To ensure you understand the complexities and comply with superannuation legislation, we recently discussed 3 of the 7 most commonly asked SMSF property investment questions. We will answer the remaining questions below.

4. What taxes apply and what are the tax advantages of an SMSF property investment?

Investment properties purchased through a SMSF are subject to tax incentives that other types of borrowers do not get to enjoy.

These include:

• Any rental income earned on a property owned by an SMSF is taxed at 15%
• The rate of capital gains tax paid if a property is sold after being held by the SMSF for a year is 10%
• When you retire and draw a pension from the fund, both of these rates reduce to zero

So, if you opt to keep the investment property after retirement and it is owned outright by the SMSF, any rental income is not subject to tax, meaning you will get to keep 100% of the rental income.

5. What are the rules of owning a property in an SMSF?

SMSFs have a range of legal obligations when investing in and owning property.

• You are unable to live in any property purchased by the SMSF.
• Your family and friends are also unable to live in it, even as a holiday home.
• Residential properties purchased by the SMSF cannot be bought from or sold to family and friends.
• Commercial properties can be leased if you run a business, but rent must be paid at market value.

When an investment property is subject to a loan, an SMSF is unable to carry out major renovations to an investment property and is only allowed to pay for general repairs and maintenance.

However, if the property is owned outright by the SMSF, renovations and improvements can be made to the property.

A property purchased by a SMSF can only be a single asset and  not multiple assets or several properties. Importantly, the property must be a single title that is more than 50 square metres.

Properties owned through an SMSF can’t be subdivided for development. You also can’t purchase vacant land.

You are able to purchase overseas property investments, but should keep in mind the laws around foreign and investment property ownership in the relevant country.

6. What is the stamp duty payable on an SMSF property investment?

Stamp duty varies from state to state. In New South Wales, when you transfer real estate you own to your SMSF you may be eligible for a stamp duty concession if the property you’re transferring is held for the benefit of the transferor member only, and the property is solely used for the purpose of providing retirement benefits of the transferor member.

In these cases the Office of State Revenue will charge a nominal duty of $500 for the transfer. When a transfer is made to a custodian of the SMSF who holds the property for the trustee, an additional $500 duty is payable.

If a loan has been obtained to purchase the property, it is important that the Duties Act  is complied with as there can be significant implications for stamp duty once the loan is repaid and the title is transferred to the SMSF from the custodian trustee.

When you transfer the SMSF property title to your own name, you will be liable for stamp duty (for example if you transfer the title when you retire). It is therefore possible that you may have to pay stamp duty twice on the same property.

7. When can you reside in the SMSF property?

Some people deliberately invest in property that is located in the place they would like to retire to for this reason.

On retirement, when you begin receiving a pension from the SMSF, you can sell your current home and the proceeds from it are treated as a contribution to the SMSF. Ownership of the retirement property can be transferred from the SMSF to your personal name.

You should ideally be purchasing the property at market value, however if the sale of your existing property is either more or less than the market value of the SMSF’s property, any shortfall or excess will be treated as a pension amount or a member contribution.

These are all subject to age and contribution caps, and individual financial advice should be sought.

Contact

DPN is an award-winning, professionally certified Property and Financial Services Enterprise. We provide access to specialist SMSF finance solutions and investment grade properties. Find out how property can help your SMSF work harder. Call us today on 1300 723 318 or email hello@dpn.com.au.