It is estimated that around 33,000 SMSFs are set up each year. With a change in regulations allowing self managed super funds to borrow, SMSF property purchase has become a glowing option. Investing using your Superannuation Fund remains a tricky endeavor. A number of factors come into play. Buying property should never be the sole purpose of setting a Super fund but it can also grant you more control on your SMSF. When done right you can avail some attractive returns as well as benefits that traditional financing does not offer.

Costs, costs, costs

In terms of costs, a Super fund is not just expensive to set up but requires a lot of time and efforts to manage. Thousands of dollars are required to set up a Super and many more before you are even permitted to opt for SMSF property finance. When considering expenses such as loan agreement, bare trust establishment cost, legal fees, bank fees and other property costs, everything keeps adding up. There are extensive audit and reports fees and regulations as well and penalties can be levied by the ATO when these terms are not fulfilled. So the first thing to know is that it can be super costly upfront. A University of Adelaide International Center for Financial Research study states that an SMSF to be cost effective must possess a minimum $200,000 in super savings. A large SMSF will perform better on account of more diversification.

Borrowing

A self-managed Super fund will be allowed to borrow approx 65-75 percent of the value of the property by most financial services. And the complex nature of the arrangement means an external financial institution will charge a higher interest rate. This is why it is ideal to own a 50 percent of the deposit to ensure the property is on a path to positive gearing. Small business owners are at a particular advantage as Superannuation laws allow them to use their property as a premise for business. Although rent must be paid to the Super at the market price don’t expect discounts. It is also illegal to use the premises as a holiday home. Penalties for these can prove costly. For these reasons, making an SMSF real estate purchase is more desirable for you if you have a large enough balance to allow diversification of investment.

Tax benefits

When it comes to enjoying tax benefits, retirees with commercial or residential properties through Super are at the top of the list. Moreover, an investor that sells off the property before they begin to draw a pension doesn’t have to pay the capital gains tax. A rental income is taxed at 15 percent when the property is held in Super. For most SMSF account holders, an SMSF property purchase pays a 15 percent tax tops on the rent earned by the property. Properties that are held longer than a year receive a 33 percent discount on all capital gain made upon its sale. This brings down any capital gains tax liability to maximum 10 percent.

Trustees

Every Super has a trustee or trustees that can either be individuals or a company. Although it’s cheaper to have an individual trustee, having a company is much more beneficial when it comes to acquiring lending from banks. A company trustee structure also offers the advantage of having limited liability and lesser administrative headaches.

SMSF loan structures

One feature of an SMSF loan is the limited recourse. This means if your Super fails to make a payment, other assets in your fund cannot be touched by banks when repossessing your property. The property is also owned by a legal structure called bare trust which makes it four identified legal entities – the bare trust and the SMSF and their respective trustees.

Documentation

With so many requirements and regulations, it is important to have your SMSF loan documents in place. Any mistake and you may be required to unwind transactions in turn costing you thousands of dollars. Join hands with a reputed SMSF service to help you navigate the maze of buying property in a Super.

The restrictions

There are some restrictions on the investments you can or cannot make with your Super. For instance, you cannot use it to buy a residential property from someone related. You or a family member cannot live in the property bought in your Super. Also, your commercial property can be bought from you by your Super, yet all transactions must be at a fair price. If you have a small Super it may not be right for you to opt for investing through your Super. The setup costs alone can result in a less than effective investment portfolio with higher risks. If you’re looking to invest through your Super you want the best investment professionals to guide you to the best investment property deals for your Super. Consult with Richman Property Investors and learn how we can help you buy the right property with your SMSF that could give you the maximum returns over the long term.