Since 2007, a new law in Australia has permitted citizens to purchase an investment property with their super fund, as well as finance. Buying property with super funds has always been permitted, but was not always achievable for those with a small fund. By adding loans to the mix, it has become possible to realise your investment dreams.
While this seems like an attractive prospect, it is a complex one. As such, understanding the strict rules that govern superannuation property purchases can help you add an investment property to your portfolio, without breaching any laws.
You Cannot Borrow Money for Improvements
If you purchase a property that requires repairs, you are permitted to borrow money to bring your house up to its original standard. However, you cannot use your loans to enhance the property beyond its original value. For example, you can repair a leaking roof, but you cannot add an extension onto the property. Some of the laws governing improvements and repairs are very thin, which means seeking advice is the best way to ensure you do not breach your SMSF contract.
Recognise the Rules Surrounding Investments
The purpose of SMSF is to invest in a property, not to purchase one for yourself or another family member to live in. No trustee relating to the SMSF can stay in the property, as this defeats the purpose of the investment. Instead, you must rent the property out to another party. While this may seem strict, you do benefit in the form of tax reductions. As well as paying less capital gains tax prior to retiring, you pay none at all if you choose to sell the property during your pension years. You only pay 15 percent tax on rent pre-retirement, and none post-retirement. This means you benefit financially, despite the strict rules.
Not complying with the rigorous rules surrounding buying property with super funds leads to harsh tax penalties at the hands of the Australian taxation office. Strict auditing and reporting requirements mean there is no possibility of breaking the rules, which means this is a decision that should only be made by those with a strict interest in property investment. The complexity of these agreements means that continuous assistance with investment management is necessary. By heading down this route, you can ensure you do not find yourself subjected to strict tax penalties as a result of accidentally breaching the rules.
