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SMSFs AND PROPERTY INVESTMENT
An added bonus to a Self-Managed Super Fund (SMSF) is that unlike the large super funds, members are not as limited in the asset classes they can invest in. SMSF members have the option to invest outside shares, like in the property market. Some set up an SMSF specifically so they can invest in property. However, investing in bricks and mortar for a superannuation fund can be a little trickier than if you were just investing for more short-term profits. Funds can invest in property directly or indirectly via these three main SMSF property categories:
There are nearly endless options when it comes to investing in property; think not just in homes, but offices, shopping centres, factories, farms and even car parks. Despite the choice, the different property categories come with different legal and tax implications and these will influence the type of property you choose to buy within the SMSF structure.
ResidentialFirst we're going to take a deeper look into residential property investments. There are specific - potentially deal-breaking - rules that apply to this category and it pays to be aware of them well in advance. First and foremost, all SMSF investments need to meet the sole purpose test, meaning members need to ensure their property investment is strictly for retirement benefit, and no other purpose. This includes the following restrictions:
Essentially, a SMSF can't take out a regular mortgage for an asset. Therefore, to invest directly in real estate a fund needs to put down a lot of money upfront - that might be a significant proportion of the fund tied up into a single asset, which is not practical or possible for most SMSFs. Especially when the fund is required to still have a ready source of cash on hand to pay for ongoing administration costs, taxes and any benefit payouts etc.
The other restriction to members of a SMSF is the limitations on buying and renting when it comes to family. Again, you and your family can't live in fund-purchased residential real estate. The ATO considers this a breach of the sole purpose test - as you or others may be obtaining financial benefit, so they argue the investment isn't specifically for your retirement.
Many are surprised to learn this includes purchasing holiday homes - but any asset of a SMSF that is subject to a lease between fund trustee and member is termed an in-house asset (IHA) and SMSFs can have no more than 5% of fund assets as IHAs. So if you rent a holiday home owned by your fund, the investment then becomes an IHA and the total value of the asset is taken into account. Therefore, for most holiday homes the % of fund assets would easily exceed the IHA limit of 5%.
Indirect Property InvestmentsAn alternative way for SMSF members to get involved with property investment without having to buy an asset outright, is to invest indirectly i.e. place fund money in investment products managed by professionals that invest in a range of properties. An advantage of this is you get exposure to a broader range of property investments than if you invested the same amount of money directly (think, not having all your eggs in one basket).
Additionally, these options allow you to invest in property without having to deal with the usual landlord responsibilities and associated direct costs of property ownership i.e. property management fees, council rates, maintenance etc. However, loss of actual ownership does come with loss of control, so you won't have a choice about when a property is bought or sold - and for how much.
The big question is, how profitable are these indirect types of investments compared with individual ownership? Well, in recent years the sector has performed pretty well - as good as can be expected when thinking long-term. With A-REITS for example, on average they increased 8-9% compounding per year over the last few years. However, on the flip side you may remember this sector was one of the worst performers during the Global Financial Crisis.
In terms of future outlook, there's been ongoing rumblings about a housing bubble in the residential property sector. There is no denying housing prices across the country have been consistently dropping over the past 12 months and this can have knock-on effects. Experts are advising caution when considering A-REITs in the current economic climate. That's not to say avoid them, more, investors should look at the property market from a long-term perspective.
Commercial/IndustrialThe rules for investing in business-related property are much more flexible and to some, very favourable. In fact, business-related real estate investments owned by fund members is one area where SMSFs currently beat out the other types of super fund - especially for those running their own businesses. It therefore may come as no surprise that non-residential real property represented 10% of total SMSF assets in 2016, a top 5 asset for that year, compared with residential property investments making up less than half of that.
Business real property is real estate used wholly and/or exclusively for business purposes. So a SMSF can invest in property that members use in their business - or even a relative's business. For example, your super fund can buy an office that your business then leases from your SMSF at a commercial rate of rent.
How is this possible? Well, even though a lease between a SMSF and a fund member would normally be over the 5% IHA limit as stated earlier, SMSFs purchasing business real property receive a special exemption. To find out more about business real property, check out this helpful video and accompanying article on the ATO website.
First Published: 26 October 2018 - Copyright © Electronic Information Solutions Pty Ltd 1990 - . All Rights Reserved.
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