Everything You Need to Know about Buying Property in Super
Back in 1992 the Keating Labor Government introduced the compulsory employer contribution scheme. Since then Australians have become comfortable with setting aside money to fund their retirement. And an increasing amount of people are investing more than just the compulsory amount and taking control of their retirement savings with a Self-Managed Super Fund (SMSF).
The Australian Tax Office says, from June 2013 to October 2017 the total number of members with SMSFs has risen steadily to over one million people.
Taking this one step further, is to then consider using Superannuation to buy property. But how possible is it? Well, if you are the trustee of your own self-managed fund it can be done, but there are many rules and regulations. It must be an investment property that neither you nor your children live in. The property will be owned outside of your Super by a Security Custodian Trust Company Trustee.
If you are still interested, here are the very first things to do:
Check Your Contributions
The biggest portion of your super comes from your employee contributions. It’s imperative you make sure the correct amount is being paid in. Double check your contributions by checking your pay slip or your super statement. Many people take little notice of their automated payments and despite employers usually being above board, some in financial trouble can ‘defer’ making superannuation contributions on your behalf. Keep your eye on your accounts. If someone doesn’t pay your compulsory superannuation, it is a serious offence.
Consolidate your accounts
Make sure all your super accounts are in your hands. As we traverse through many different careers, our money can end up in a number of different super accounts. Track down all your old super accounts and consolidate them into the best performing account.
Set Up Your SMSF
Before you even consider purchasing a property, with help from your super, you need to set up a Self-Managed Super Fund. When you establish a SMSF you have a choice of whether to appoint Individual Trustees or a Company Trustee, to act for your SMSF. This is where it gets a little complex, so bear with us.
In order for a SMSF to borrow to acquire a property, it must establish a Security Custodian Trust Structure. The Trustee of the Security Custodian Trust must be a Company. The Directors and Shareholders of the Security Custodian Trust Company, must be the Trustees of your SMSF (if you have Individual Trustees) or the Directors of the Company (if you have a Company as Trustee for your SMSF).
The company that will act as Trustee (of the Security Custodian Trust) can be setup after the loan has been approved but must be setup before the Property has been acquired (i.e. the Purchase Contract signed). The holding trust will own the asset until the loan is paid out. And you may require a higher deposit, than if buying in your own name.
Once you have set up your SMSF, you will need to rollover your super benefit and contribute to the SMSF.
Once the Security Custodian Trust documentation has been signed, the Security Custodian Trust Structure will have been established. This is when you can purchase the property of your choice. Whoohoo!
But, note; the property must be purchased in the name of the Security Custodian Trust Trustee Company. All directors of the company must sign the Purchase Contact. The Purchase Contract should be signed ‘subject to finance’. The name of your SMSF or the Trustees should not be on the Purchase Contract. These include the need to establish a holding trust, that will own the asset until the loan is paid out, and you may require a higher deposit than if buying in your own name.
At Settlement all the money to fund the property will come from the SMSF and the advanced load. The vendor at that time will provide a copy of the signed transfer of the Property to the Trustee of the Security Custodian Trust. The Property Transfer and the mortgage are registered. This will be arranged by your solicitor or conveyancer.
The Fine Print
It’s essential to check the fine print on any Property you are considering purchasing using you SMSF. Your asset needs to meet all of the requirements of the borrowing provisions. It’s important to realise that an investment Property can generate a number of additional costs that can take away from the return you are expecting.
Receive Tax Benefits
SMSFs can use negative gearing to claim a deduction for borrowing expenses, just like individuals.
Property Rent and Expenses
After settlement the Property can be rented. The Rent must be deposited into the Transaction Bank Account. All Property Expenses including loan repayments will need to be made from the Transaction Bank Account.
It is imperative to do some research on potential rental returns for different properties and different locations. But one factor many people underestimate, is the importance of choosing the right tenant. There is no point delving into your Super to buy the perfect property in the perfect area, only to have it damaged by the wrong tenant. ‘Tenant risk’ can include non-payment of rent, damages to the property, a tenant not complying with your rules such as keeping animals on your property etc. Remember, using your SMSF to purchase property puts restrictions on use of the property, so the owners or their children are prevented from using the property.
Of course, risks are not unique to owning an investment property through your SMSF. But it is something that you do need to consider. Your investment objectives are just as important as if you had purchased the property personally, outside of super.
Foreign Property Investment
If you seek to buy a property overseas, you have to take note of foreign currency risk. Obviously when the Australian dollar rises, the value of foreign investments declines. Exchange rates are inherently unpredictable. It can be very risky if it is a short-term overseas investment you are after. The price of the property would have insufficient time to a mean valuation, not like a longer-term equivalent.
So what are the risks of having a holiday home bought with your Super? Well the idyllic location you choose to spend your weekends and summers may have a transient population and therefore fluctuations in demand. These areas are more likely to be affected by downturns and located outside of major cities. Limited capital growth can often be seen in these areas and this can cause havoc on your wealth creation. You also need to decide who looks after your property when you are not there. Cleaners, gardeners and regular maintenance can weigh heavily on your pocket.
You should take out all appropriate insurances to protect your assets, just in case something unforeseen occurs. This is not a factor that can fall by the wayside. You need to protect your property and your retirement nest egg.
What are the benefits
One of Australia’s leading real estate buyer’s agency groups, Cohen Handler has listed the benefits of buying property investment with an SMSF:
- It’s a relatively stable and low risk investment compared to other options and can offer considerable returns
- It offers a way to diversify your investment portfolio
- Positively geared investment properties can generate an additional revenue stream
- You have more control over property investment than you do with other options, such as shares which may be subject to short term fluctuations and market forces
- Members of SMSFs can gain access to significant tax efficiencies, only available in the superannuation environment including:
- no capital gains tax once member(s) retire
- loan repayments can effectively become tax deductible (provided members salary sacrifice)
- negative gearing benefits inside SMSF environment
- income after expenses and any capital gains on the disposal of property is taxed at a maximum rate of 15%, compared with rates of up to 46.5% that a regular investor could be paying
- Employer superannuation contributions can be used to help repay any loan associated with the property
- Assets held in a SMSF, will under normal circumstances, be protected against general debt recovery and bankruptcy proceedings.
Some fortunate SMSF owners are able to buy a property outright. This is obviously much less complicated and ensures that your SMSF won’t be losing revenue in repayments and will provide a steady income stream, to fund other investments or to grow into cash savings.
But, both those who can fund a property outright, as well as borrowers need to ensure your SMSF has enough capital to fund the purchase and other ongoing expenses, such as management and repairs.
Before you embark on any moves with your Super you should GET ADVICE. We strongly recommended you see a financial advisor who can help identify any cracks in your plan. Preparation is essential as the information can be quite overwhelming. It’s also better to prepare for any hazards, rather than try to rectify them later, or when it is too late. Happy house hunting!
Published: 17 May 2018