A self-managed super fund (SMSF) is a flexible investment structure that enables you to manage your own retirement nest egg: a fund through which you can own assets to build wealth with more flexibility. It can be an effective approach for business owners to buy commercial property through their SMSF as well as for couples looking to invest in a residential or retirement property.
However, when assessing if owning a property in an SMSF is the right option for you, it’s crucial to reflect objectively and be aware of the rules and regulations. It can be quite a complex process, particularly when it comes to borrowing the money to buy the property and the types of properties that lenders will provide funds for.
Before considering buying a property through an SMSF, here are a few key things you might like to consider:
1. Tax Concessions
- Owning property in an SMSF means the property is open to tax concessions that apply to superannuation.
- Taxes on capital gains may still apply when owning property through an SMSF.
2. Asset Protection
- When we think of SMSFs, given their flexibility, most of us focus on investments; however, an SMSF can also play a key role in asset protection.
- SMSFs are trusts. Like other trusts, assets are owned by trustees. For example, if a business creditor pursues a debt, and your business premises are owned by your SMSF, then those assets will generally be out of reach.
3. Investment Strategy and Diversification
- When owning a property, careful consideration should be given to the overall investment strategy and diversification.
- It’s worth considering whether you should be putting all of your eggs in the one basket.
- Through the impacts of COVID-19, we’ve seen that property growth may not always occur in double digits, and rental income isn’t always guaranteed.
- Diversification in the type of asset isn’t the only aspect to consider. Consideration should also be given to diversification in sources of income.
4. Cash Flow and Liquidity
- Property isn’t liquid. If you need cash fast, you can’t just sell one of the rooms, the toilet or the floors!
- Superannuation constraints place limits on how much you can contribute to superannuation each year. Because of this, it is important to consider your next steps in the event that contributions (along with your rental income) aren’t enough to offset your ongoing costs.
5. Inter-generational Passing of Wealth and Succession Planning
- Death is a “compulsory cashing condition” meaning that, upon death, balances attributed to the deceased must be paid out. The payment is usually paid out as a lump sum, unless the surviving owner is a spouse or children who meet specific superannuation “dependent” criteria.
- Owning property in an SMSF is a potential liquidity issue that needs to be managed, especially since property is typically a large asset relative to the SMSF. The death of a loved one, or succession, may force you to sell the property, and not at an opportune time.
These considerations highlight just how important it is to ensure you have a well-thought-out strategy before you embark on owning property in an SMSF. The good news is that you don't have to do it alone. Our BlueRock accountants, financial advisors and SMSF experts can assist you in every component of the process and are always happy to have an obligation-free chat.