There could be several benefits of buying property through an SMSF.
If you buy and hold property within your SMSF until you retire and then start drawing a pension from your fund, when the fund sells the property, the transaction will generally be exempt from capital gains tax. Also, any income your fund receives (i.e. rent) while you are drawing a pension will be completely tax free.
Before you start to draw a pension from your SMSF, any rental income generated will be taxed at a maximum of 15%. If the fund sells the property after holding it for at least one year, your fund will only pay capital gains tax on the sale of the property of up to 10%.
Comparatively, if you were to buy the same property in your own name, rental income would be taxed at your personal tax rate (which could be as high as 47%). This tax rate would also apply to any capital gains payable on the sale of the property (albeit after receiving a 50% reduction if the property was held for more than one year).
You may not be able to afford to buy property in your own name; however, you and other members of the fund might have a reasonable amount of combined super saved inside your fund. Buying property through your fund might be a good way for you to achieve your goal of owning an investment property or owning your own business premises.
Benefits for business owners
If you own your business premises through your super fund and you lease it to your business, the rent you pay to your SMSF is generally tax deductible to your business. Given the relatively low concessional contribution limits that are currently available, paying rent to your super fund could be a great way to accelerate your retirement savings without exceeding the contribution limits.
Assets held in a superannuation fund (including property) are generally protected from creditors in a bankruptcy. However, before you decide to invest in property through your SMSF, you should consider these points:
Investment – any property investment must align with your SMSF’s investment strategy.
Diversification – property generally has a significant value and may reduce diversification in your portfolio, depending on the value of your fund’s other investments and what asset classes they are in.
Liquidity – the nature of property could make it difficult to dispose of quickly. You should check whether your fund is sufficiently liquid and able to pay expenses and benefits when the need arises without having to sell the property at short notice.
We recommend that you speak with a financial adviser to help you decide if buying property through your superannuation fund is right for you.