There has been a lot of talk in recent years about superannuation. Superannuation is money you put away for retirement through your employer or by making regular payments into a fund. Your SMSF must pay market rent if you live in or use a property it buys. When you are buying a property with super, you will be investing it in the future. However, you can use a property for your benefit only if you pay market rent.
What is an SMSF?
SMSF stands for the self-managed super fund. It's a type of super fund that you manage and control, rather than the government or an investment manager. You can choose to invest your super in assets other than property.
The assets you can invest in are specified in the Superannuation Industry (Supervision) Act 1993. The main categories include:
- cash;
- term deposits;
- money market securities; and
- equities listed on an approved stock exchange
What can you buy through an SMSF?
- Property: You can buy any property, including residential and commercial properties.
- Motor vehicles: You can also invest in motor vehicles such as cars, motorbikes and boats.
- Business investments: You can purchase shares in a publicly listed company or create your own business using an SMSF. If you want to explore starting your own business this way, get professional advice from ATO first.
- Life insurance: Some types of life insurance policies (called allocated pension funding policies) are eligible for purchase by members of an SMSF if they meet specific criteria. Your financial adviser will be able to advise whether these make sense for you at this stage of your life.
What To Consider?
Consider using some of your super savings to pay stamp duty when purchasing an investment property. Stamp duty applies at different rates depending on the property's location. It ranges from 0% (NSW) to 15% (Qld). On top of this, there are other ongoing costs, such as council rates, maintenance fees and water rates which must be factored in when deciding whether or not your SMSF can afford them.
Firstly, if you sell the property for more than its purchase price, you will be liable for capital gains tax on any gain. Also, your fund included an unapproved non-concessional contribution when purchasing the property. In that case, selling could cause problems because there could be significant tax payable on those additional contributions within the fund (and these funds can only come out as super pension payments). That's why any significant investments made in super must receive prior approval.
How do you establish and run an SMSF?
To open an SMSF, you must:
- Be at least 18 years of age.
- Be an Australian citizen or permanent resident. If you are a temporary resident, the Commissioner for Taxation can approve your application if it is in the best interests of your SMSF to operate as one. This approval will be valid for 12 months and may be renewed yearly.
- Not be bankrupt or insolvent;
- Not be a prohibited person (see below);
- Not having a spouse who is a prohibited person (see below).
Is buying a property with super right for you?
In deciding whether to invest in property through your super, you must consider the rules and risks. Several rules apply specifically to residential real estate investments through an SMSF. You may face civil or criminal penalties, including fines or imprisonment, if you break them.
Know the rules and risks
- Superannuation funds can invest in residential and commercial real estate, but there are several rules about how this is done. For example, you need to know if your fund has a current approved property strategy to determine how it will invest in real estate.
- Be aware of the tax implications of investing in residential and commercial property through superannuation.
- Think about whether it's right for you to use your superannuation to buy an investment property after considering all relevant factors, such as your age, financial situation, risk appetite and any other assets you may have available to help fund this purchase
Also Read: Essential Elements Each Invoice Should Incorporate
