SMSF Property Investment: Eligibility, Benefits & Borrowing Explained

Australians are now more likely than ever before to access their retirement savings for investing in real estate to generate long-term wealth. The Self-Managed Superannuation Fund allows you full discretion on how you want to invest your super and not leave that up to the big fund managers. 

This guide provides detailed information about SMSF property investment by telling you who qualifies, the advantages you will be able to get from it, and borrowing within an SMSF. It’s great whether you have a fund or are considering setting one up.

Eligibility Criteria to Invest in Property through SMSF

There are some basic criteria established by the super rules that you should fulfil before purchasing an asset for your super fund. The purpose of these criteria is to safeguard your future and maintain compliance with your fund.

• Minimum balance: Normally, a fund is required to have a minimum balance of $200,000 to $230,000 in order to make the strategy viable.
• Income criteria: A minimum total income of $200,000 per year is required by the fund so it earns more than $24,000 in annual contributions; in case of a higher super balance, this criterion may be relaxed.
• Contribution from self-employed person: In case of self-employed individuals, super contributions are voluntary, but you must have a good contribution history of at least two years.
• Maximum membership: An SMSF can have a maximum membership of six people jointly.

Why Should You Think About Using an SMSF for Property Investing?

Making your investment via your superannuation does not just mean that you have ticked a compliance requirement box; it alters the way and time frame in which you can access your money as well as significantly enhances your cash flow in the meantime.

• Repay your home loan in 5-10 years rather than the usual 25-30-year period.
• Decrease your tax burden to up to 83 per cent using the reduced super tax rates and legal deductions.
• Have $500 extra in your pocket each month due to proper interest rate structure.
• Retire with an annual income of about $100,000 by establishing your equity faster rather than later.
• Stop being concerned about paying bills if you suddenly cannot work anymore because your super fund continues earning money for you.
• Start investing with $50 each week, thus making this approach affordable.
• Get your children enrolled in your preferred school through the long-term equity buildup rather than strained monthly cash flow.
• Buy your dream house before its price becomes too high for you.

In addition to these, an SMSF allows you to access your money early. Under ordinary superannuation arrangements, your funds will not be available to you until you reach the preservation age; however, under SMSFs, you can use this money on real estate much earlier than 67 years.

How Does One Benefit from Tax Savings in an SMSF?

One of the key advantages of such a strategy is tax savings, which are actually quite simple once you have understood how the system works. The income generated by the assets of your SMSF account within the accumulation phase is taxed at a rate of 15%, which is far lower than marginal personal taxes.

The benefit can be extended over time because if your investment has been held for longer than 12 months, you get a 10% rate of taxation. Apart from that, the property purchased through an SMSF allows for negative gearing, whereby you get a tax refund for the difference between income generated and the loan repayment costs.

Key Rules for SMSF Property Investment

The investment in SMSF property is not the same as buying an ordinary investment property. There are certain structural rules to follow, which could otherwise pose problems when complying in the future.

• One Contract Only: The property should be bought using one unified contract.
• Investment Purpose Only: It is not allowed to live in the property or allow a related party to occupy it.
• Contribution limits: An individual is able to make $30,000 contributions a year and receive a tax benefit of 15%; however, there is a limit of $120,000 in total.
• Funding: Contributions can be made from savings or from equity, but in case of using equity, a finance meeting is advisable.

What Is SMSF Borrowing Capacity?

The second issue we get asked frequently about is whether having an SMSF property has any impact on an individual’s borrowing capacity. The answer is no, and it is this very factor that makes it an appealing choice for many property investment groups.

An SMSF property basically looks after itself. Any rental income will go back to the fund account rather than to you personally, and the loan will be held in your own tax return. For this reason, you’ll always have a completely separate borrowing capacity for making any other purchases in the future or expanding your property management portfolio outside of super.

Creating Long-Term Wealth through Simply Wealth Group

The ability to get the right structure in place right from the beginning will set you apart from those whose property investment with SMSF can be a frustrating experience. This is where having an experienced partner will make all the difference, particularly if you have to deal with eligibility criteria, borrowings and future planning all at once.

Simply Wealth Group has been helping many Australians create a truly diversified property portfolio from their super for years now, through hands-on mentoring and providing exclusive properties that are unavailable to anyone else. With assistance through each stage of the journey and not just at settlement, our team can help you create the wealth you really desire.

FAQs:

Is it possible for me to use my SMSF to invest in a holiday home for my own use?

No, the property acquired by using the SMSF must only be invested for investment purpose and no one, including yourself, your family, or any related parties are allowed to occupy it for any recreational purpose.

What will happen to the rental income collected through an SMSF property?

The rental income collected is directly credited to the superannuation fund account, and not your personal account, and it is taxed according to the concessional rate applicable to the fund.

Is it possible to include someone from my family in my SMSF after its formation?

Yes, it is possible to add members up to six, but all the members become equally responsible for the property as trustees. It should be noted that the contribution ability of all members should be checked before including anyone in the fund.

Will it affect my ability to borrow money for a house purchase?

Absolutely not; the loan inside your SMSF will be completely separated from your own finances. The lender will only evaluate the loan inside the SMSF according to the income and assets of the SMSF and not your personal ones.

What if there isn’t enough equity in my SMSF to purchase a house outright?

Quite often, an SMSF relies on both savings and equity to finance the purchase. It is advised to schedule a financial consultation before the purchase to know how much you can actually borrow.