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Most hard-working Australians have the chance to grow their retirement pot with the help of their superannuation guarantee, which entitles them to ten per cent of their salary contributed to their savings. But to drive up their wealth to greater heights, setting up a self-managed super fund (SMSF) shows plenty of potential as it’s one of the most accessible investments throughout the land down under. 

Taking up a whopping 25 per cent of the $2.7 trillion dollars worth of superannuation in 2021, it goes to show that people are starting to maximize the benefits of an SMSF. It’s a particularly booming tactic for real estate investors who plan on purchasing residential or commercial property through an SMSF, which is only possible if you meet the eligibility requirements. 

What are the SMSF Property Rules You Should Know? 

Before you can make a property purchase through an SMSF, you first have to comply with the following rules: 

  1. The property should pass the “sole purpose test,” which requires it to deliver requirement benefits to fund members. 
  2. The property must not be purchased from a related party of an SMSF member. 
  3. The property must not be used as a residential dwelling for fund members or their related parties. 
  4. The property must not be used as a rental space for fund members or their related parties. 

The last rule may be confusing since SMSF allows commercial property investments, but keep in mind that it can only be leased to a fund member and at the market with strict adherence to the Australian Taxation Office’s SMSF rules.

Buying Property through SMSF Borrowing 

It is possible to borrow money from your SMSF, but it involves agreeing to a limited recourse borrowing arrangement. This entails the borrowing being able to buy a single asset only, so you will have to choose between borrowing to afford a residential or commercial property.

Investing in commercial property comes with more benefits than a residential one since at least you can sell the SMSF to its members and lease to SMSF trustees. Related parties and businesses can also benefit from commercial properties in an SMSF, though borrowing will be significantly more challenging as lenders employ stricter loan to value ratios. 

Tax Implications of Buying or Renting Property Through SMSF

Your rental income will be taxed at a concessional rate of 15 per cent for commercial properties, though the capital gains tax liability can drop to 10 per cent after 12 months. 

The Bottom Line: Is Buying Property through SMSF the Right Move For You

Investing in property through an SMSF isn’t the best choice for everyone as it comes with risks and advantages, so it’s important to lay down your goals to see whether SMSF borrowing aligns with it. Compared to residential properties, taking out a commercial property loan through SMSF offers more pros as you can reap the rental income paid to your retirement savings. 

Are You Looking for the Best Mortgage Lenders in Sydney, Australia?

Wealthy You is one of the leading mortgage companies in Sydney, offering a variety of mortgage solutions that meet every clients' needs. We can help you how to start an SMSF, or how to use superannuation to buy property. 

With expert alternative finance providers by your side, you’ll see that there is always a way to unlock the home of your dreams. Get in touch with us at (02) 7900-3288 and get your loan approved today!

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