The common belief is you can no longer acquire property within a Self-Managed Superannuation Fund (SMSF), but this is not the case. As a business owner or property investor, you might be exploring various investment strategies to secure your financial future. One viable option is purchasing property within your SMSF. This article will guide you through the essentials of buying either commercial and residential property within your SMSF, how Limited Recourse Borrowing Arrangements (LRBAs) work, the current lending landscape for SMSFs, and the importance of seeking professional advice.

Why Consider Property Investment in Your SMSF?

Investing in property through an SMSF offers several compelling benefits:

• Tangible Asset: Property is a physical asset that many investors find more appealing and easier to understand compared to stocks or bonds.
• Long-Term Growth:  Property has the potential for significant long-term capital growth, which can be beneficial for an investor’s overall growth and retirement strategy.
• Control Over Business Premises:  For business owners, purchasing a commercial property through a SMSF allows them to lease the property back to their own business. This has a number of benefits for the owners of the business in removing risks associated with being a tenant, such as the termination of a lease at expiry of term, and comfort in the knowledge that any improvement to the premise for benefit of the business also benefits the SMSF.

Types of Properties You Can Purchase

As an investor you are not limited to a specific type of property.

• Commercial Property: Purchasing commercial properties can be strategic, especially for business owners who may lease the property to their own business, creating dual benefits of rental income and capital growth within the super fund.
• Residential Property: SMSFs can invest in residential properties as long as they comply with ATO regulations, such as not being rented or lived in by a member of the SMSF or any related party.
• Specialised Property: This is where it may get a bit tricky. Properties like NDIS/Co-Living environments, petrol stations, and student accommodation have limited lender appetite and should be discussed on a case-by-case basis.

Diversification

Diversification is a crucial aspect of any investment strategy, and SMSFs are no exception. By including property in your SMSF portfolio, you can:

• Spread Risk:  Diversifying across different asset classes, such as property, shares, and fixed income, helps mitigate the risk of poor performance in any one area. Property investments often behave differently from other asset classes, providing a buffer against market volatility.
• Enhance Stability: Property can offer stable returns through fixed rental income and potential capital appreciation, contributing to a more balanced and resilient investment portfolio.

Potential Tax Advantages

Investing in property through a SMSF can offer significant tax benefits:

• Concessional Tax Rates: Income generated from SMSF investments, including rental income and capital gains, is taxed at the concessional superannuation rate of 15% during the accumulation phase. In the pension phase, rental income and capital gains can be tax-free.
• Capital Gains Tax (CGT) Concessions: If the property is held for more than 12 months, any capital gains have the potential to be eligible for a one-third discount, reducing the effective CGT rate to 10%.
• Deductions and Depreciation: SMSFs can claim deductions for expenses related to the property, including interest on loans, maintenance costs, and depreciation, which can further reduce the taxable income of the fund.

Limited Recourse Borrowing Arrangements (LRBAs) and How They Work

A LRBA allows your SMSF to borrow money to purchase a single asset, such as property, while limiting the lender’s claim to the asset acquired. If the SMSF defaults on the loan, the lender’s recovery is limited to the asset itself, protecting the rest of the SMSF’s assets.

When setting up an LRBA, it is necessary to establish a bare trust (also known as a custodian or holding trust) to hold the property on behalf of the SMSF. The bare trust acts as a separate legal entity, holding the property title until the loan is fully repaid. Here are the key steps involved:

1. Establish the SMSF: Ensure your SMSF is set up correctly and is compliant with ATO regulations. It is recommended that you obtain independent professional advice prior to the establishment of a SMSF to make sure it is the right option for you and the funds members.
2. Bare Trust Setup: Create a bare trust to hold the legal title of the property. The SMSF trustees will be the beneficial owners.
3. Loan Application:  Apply and obtain preapproval for a limited recourse loan with a lender. The loan documents will specify that the lender’s recourse is limited to the asset held in the bare trust.
4. Property Purchase: The bare trust purchases the property using the borrowed funds along with any additional SMSF funds.
5. Loan Repayment: The SMSF makes loan repayments using a combination of its existing incomes, rental income from the property being acquired, and via member contributions.

The Current Lending Landscape For SMSF

It is important to note that major banks in Australia have withdrawn from providing new loans to SMSF’s for property purchases. This significant shift began around 2018 when several major banks, including Westpac, ANZ, and Commonwealth Bank, decided to exit the SMSF lending market. The decision was influenced by a combination of factors including regulatory pressures, the complexity of SMSF loans, and concerns over the suitability of such loans for the average investor.

An important issue to note for investors with existing lending arrangements via their SMSF is that all major banks no longer provide interest rate concessions on their products for SMSF lending. This means that if you have existing lending in place via your SMSF it will be paying an interest rate premium over and above what non-bank lenders in the market will offer on a similar lending proposal.

As a result of the major banks having no ongoing risk appetite, the market for lending to SMSF’s now relies on non-bank lenders and specialised financial institutions for financing. These lenders often have different lending criteria and due to diversified funding sources can offer funding options which are no longer available by banks.

Seek Professional Advice

Given the complexities and regulatory requirements of investing in property through a SMSF, professional advice is indispensable. Accountants and financial advisors can help you determine if this strategy aligns with your long-term goals and ensure compliance with superannuation laws.

Purchasing property within your SMSF can be a powerful strategy to build wealth and secure your financial future. However, it comes with specific challenges and regulatory requirements. Always seek professional advice to ensure this approach is suitable for your SMSF and its members. For more information or personalised guidance, feel free to contact our team of experts at LZR.