Using a self-managed superannuation fund to buy property

The number of self-managed superannuation funds (SMSFs) and assets held has grown steadily over the 12 months to March 2014, according to the latest statistics from the Australian Prudential Regulation Authority (APRA). SMSFs currently hold assets of $558.6 billion (compared with $492.7 billion in March 2013), and the number of entities has increased to 528,701 in March 2014 (compared with 501,667 in March 2013).

So what’s the reason for this growing trend?

Tax benefits

Any financial adviser will tell you that the key reason people set up SMSFs is for the tax breaks.

For a complying SMSF, the tax rate is a negligible 15 per cent per annum, and this can look quite attractive to some investors. However, for investors to take advantage of this tax rate, the property itself (and the funding of it) must meet several strict requirements.

These requirements are:

• The property purchase must be for the sole purpose of providing retirement benefits to fund members. If the property is being held on trust or for some personal enjoyment, the waters can become very murky.
• The property cannot be acquired from a party related to the fund member.
• The fund member or any relatives cannot live in or rent the property.

These requirements are in place to preserve the fair market value of the property.

Asset protection

Another key advantage of buying a property asset through your super is asset protection. Like a trust fund, a super fund can preserve your investment regardless of marital breakdown, bankruptcy, liquidation or other significant life event. Unlike other kinds of asset protection, however, running an SMSF can come at a significant cost due to ongoing maintenance fees and reporting requirements.

Stronger control over investment returns

Many trustees of new SMSFs are convinced that they can outperform the big super funds. In a recent survey, 28 per cent of trustees surveyed told research specialist Investment Trends that one of the reasons they set up an SMSF is the belief that they can make better investments than the big fund managers. Although this may be the case, like any investment, it comes down to thorough research and sound financial advice.

Fees and charges

To set up and manage an SMSF, you need to consider the establishment, advisory fees and ongoing maintenance costs. In this regard, your best bet is to shop around, as some financial advisers can charge exorbitant fees. Australia Securities & Investments Commission (ASIC) is currently cracking down on some firms that use government schemes to lure first-time fund investors.

Borrowing

Another thing to consider is funding. By law, you can use only a limited recourse loan to purchase SMSF residential properties. You will also need enough cash flow in your super fund to manage the upkeep of the property.

At the end of the day, buying a property through an SMSF is not a one-size-fits-all approach. Although it may suit some, it’s a decision that requires a lot of research and discussion with your trusted financial adviser.