Superannuation and SMSF

5 ways your SMSF can invest in property

Adviser Julien Frendo Julien Frendo
12 December 2023
5 min read

In recent times, an increasing number of individuals are exploring the possibilities of establishing and managing a Self-Managed Superannuation Fund (SMSF) with the specific goal of getting into property investment. The potential tax advantages, coupled with asset protection benefits, have made property investment within an SMSF an attractive prospect. However, before taking this step, it’s important to not only understand the advantages but also recognise the limitations that come with holding property within the fund.

Exploring the benefits and limitations of purchasing and holding property within an SMSF

Investing in property within an SMSF offers a unique blend of advantages and constraints that demand careful consideration. Let's delve into the key factors to weigh before incorporating property into your SMSF portfolio.

Benefits for property investments within an SMSF:

  • Access to a reduced tax rate of 15% on rental income and capital gains.

  • Opportunity for the client's business to pay rent to the SMSF.

  • Flexibility in covering property costs from either the SMSF or the business.

  • Effective estate planning and asset transition to beneficiaries.

  • Ability to transfer the property as a lump sum benefit upon retirement.

  • Enhanced asset protection and separation.

Limitations for Property Investment within an SMSF:

  • Lack of liquidity for the property within the SMSF.

  • Inability to borrow funds for property improvements.

  • Restrictions on leasing residential property from a member or related party.

Five ways of purchasing property within your SMSF

SMSF trustees have five distinctive methods to acquire property within their fund, each catering to different needs and circumstances.

Cash Purchase

Cash is the simplest way of purchasing property in your SMSF. The cash is transferred to the seller as part of a contract to acquire the property.

Limited Recourse Borrowing Arrangement (LRBA)

An LRBA requires pre-approval from a bank to borrow up to 70% of the value of the property. This arrangement requires the SMSF to demonstrate its ability to service the loan. An LRBA must be recommended by a licensed adviser, such as those at Findex, and can provide a method to finance some of the purchase of a property.

LRBA methodRead more about how SMSFs can explore the related party LRBA refinancing with commercial lenders.

Tenants in Common

This method allows two or more parties to purchase a designated portion of the property. This method only allows the SMSF to borrow against the property. Administration generally consists of a joint bank account with profits and expenses split per the proportion of each party.

Tenants in Common method

Ungeared Unit Trust (Related)

The use of an ungeared unit trust allows for members with wealth inside and outside of super to pool their money into the trust through the purchase of units to acquire a property. While this method has additional setup and accounting costs for the unit trust, the proportion of the property owned by each party can be varied through the issue, purchase or sale of units between the SMSF and the other entities.

Ungeared Unit Trust method

In-Specie Transfer

This method allows the fund members to transfer the property into their SMSF through using the available contribution caps of all members. The property must be transferred using the current market value obtained through a valuation. This method can be used in conjunction with other methods such as part cash purchase.

In-specie transfer method

Download “The 5 ways to get property into your super” for the specific steps for each of these methods of purchasing property in your SMSF.

Navigating SMSF-related party rules

Understanding the related party rules that apply to property investments is crucial for SMSFs engaging in property transactions within the fund.

Key rules

You can:

  • Purchase a residential, commercial, and industrial property.

  • Purchase a commercial property from your business or relative.

  • Lease a commercial premises back to your business.

  • Personally use any property in an SMSF.

You cannot:

  • Purchase a residential property from yourself or a related party.

  • Lease a residential property to yourself or a related party from the SMSF.

Investing in property within your SMSF: Next steps

Take the first step towards property ownership within your SMSF by reaching out to our dedicated SMSF specialists.

  1. Contact our SMSF specialists and book an appointment.

  2. Review your options and preferred purchasing method: With help from our SMSF team, explore the various property purchase methods available for your SMSF.

  3. Implement your property purchase strategy: We work with you to execute your chosen strategy, including applying for any necessary finance.

  4. Become the proud owner of a new property within your SMSF.

Connecting with our team of SMSF specialists means you get the expert advice you need to establish an SMSF or incorporate property into your existing SMSF. They are here to guide you through the process, helping you navigate the complexities and get you on track to owning property within your SMSF.

Adviser Julien Frendo
Author: Julien Frendo | Senior Accountant