Investing in property with a self-managed superannuation fund

However, the ability to use your biggest and most important asset for retirement – your superannuation – to get exposure to direct property can be quite limited in the industry and retail fund landscape, which many Australians have. 

One of the key benefits of using a self-managed superannuation fund (SMSF) is the control and flexibility to choose where you invest your retirement savings, and this can include investments in direct residential and commercial property. 

While there certainly are some restrictions and traps to consider, there are also many options and potential advantages to investing directly in property, some of which we’ll discuss in this article.

Residential property

An SMSF can purchase residential property outright, including housing, apartments, and holiday units. Trustees have direct control over rental terms and decisions regarding the property, giving greater flexibility to obtain better investment returns. Residential property also tends to cost less than commercial property, which allows diversification for the SMSF’s investments more easily. This asset class has historically provided long-term capital growth and rental income, which in the SMSF environment are only taxed at 15 per cent (or 10% on long term capital gains) and in some cases, the returns are not subject to tax at all if all the fund’s members are in pension phase.  

There are, however, restrictions regarding who the property can be purchased from and rented to, that need to be strictly adhered to. This is mainly around ensuring the property is being used to generate returns for retirement, and not as a present-day benefit for members or their relatives.

Commercial property

Additional opportunities are available for commercial property that don’t apply to residential property. Commercial property such as office space, warehouses, and rural property (where a primary production business is operating) may be classified under superannuation law as 'business real property'. This classification allows the SMSF to potentially purchase from, and lease the property to, related parties such as the member’s private business. This is of course provided the intention to purchase the property was made with retirement in mind (sole purpose test), and that the parties carry out the transactions at arm’s length, considering the market value of the property and appropriate rent and lease terms. 

For example, an SMSF may choose to buy the operating premises of the related business, then lease back the premises to the business to generate rental income for the SMSF, which is also deductible to the business.

Limitations and considerations

There are some considerations before investing in property with an SMSF:

• An SMSF is not right for everyone, and you should seek professional advice from a suitably qualified adviser to determine if it is right for you.
• Property can become a significant part of an SMSF if not properly diversified. This can potentially put ‘all of the eggs in one basket’ which can be a significant risk. 
• Business real property purchases and lease arrangements with related parties must always be made and maintained on an arm’s length basis to comply with the superannuation laws. Independent valuations and rental assessments are periodically required to verify this. 
• Borrowing in an SMSF is permissible but can only happen under strict Limited Recourse Borrowing rules, which means that borrowing in superannuation is not as straight-forward as normal. This may require the SMSF to have all the cash required to fund the purchase of the property.

We’re here to help

At Grant Thornton, we offer a National Superannuation team to support you and your family with the accumulation phase of your superannuation journey, right through to retirement. For further details, or advice and guidance on owning property in an SMSF, please reach out to your local adviser today. 

Learn more about how our Superannuation and SMSF services can help you

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_{The above information is provided as an information service only and, therefore, does not constitute financial product advice and should not be relied upon as financial product advice. None of the information provided takes into account your personal objectives, financial situation or needs. You must determine whether the information is appropriate in terms of your particular circumstances. For financial product advice that takes account of your particular objectives, financial situation or needs, you should consider seeking financial advice from an Australian Financial Services licensee before making a financial decision in relation to any of the matters discussed.}