Top Five Benefits of Investing in Property in a Self-Managed Super Fund 

In Australia the modern version of the Self Managed Super Fund was established back in 1999. Unlike a traditional superannuation fund which is managed by professional trustees, as SMSF is - as the name suggests - managed by its members; who act as trustees. It’s the alternative to the ‘mainstream’ superannuation fund that permits individuals to have more direct control of their savings. 

According to the ATO, as of March 2023 there are just over 600,000 SMSFs with a total of more than 1.13 million members. The collective value of the assets within these SMSFs is stated to be just under $900 billion. Needless to say the popularity of the SMSF has grown over the past two decades with more everyday Aussies deciding to take charge of the management of their retirement money. And with 87% of SMSF holders being 45 or older it's indicative of people using this type of super fund as an instrument to supercharge their retirement savings plan

Building a real understanding self-managed super funds 

On the surface it may seem that it’s a no-brainer to convert to a self-managed super fund compared to a standard superannuation fund. The ability to utilise the savings as part of your overarching financial plan; and generally having more control over the management of your money obviously has its perks. But it remains a highly regulated environment with robust checks and balances in place meaning you do require a decent understanding of both the superannuation and investment landscape. The comfort in having professionals manage a standard superannuation fund means most people spend minimal time thinking about their super. However, this approach doesn’t translate to an SMSF where as a member you’re more likely to be involved in making decisions regarding your retirement savings. It is therefore recommended you engage or seek professional advice from experts in this field whether that be an accountant, a financial planner or advisor; or even a SMSF specialist.

Key points to know about SMSF

Apart from some of the main benefits here are five factors to consider regarding a self-managed super fund: 

  1. Structure: An SMSF can have a maximum of 6 members. Sometimes this will be family members or business partners - but each member is either a trustee or a director of the corporate trustee and is responsible for managing the fund. 
  2. Control and choice: The SMSF provides members with a lot more flexibility over their investments compared to a standard superannuation fund. This means you control where your investments are made - choosing from a variety of options like shares, property, cash and even managed funds. Of course as is standard with any investment approach the choice and combination of selection will be dictated by the strategy in place and the level of risk that is deemed tolerable to all members. 
  3. Regulation and compliance expectations: All SMSF’s are regulated by the Australian Taxation Office (commonly referred to as the ATO) and must be compliant to all related superannuation and tax law. Every trustee has responsibility to ensure their self-managed super fund adheres to each obligation including strict record taking, as well as reporting and auditing requirements. These are non-negotiable and must be taken seriously.
  4. Operating responsibility: The day to day running of a SMSF includes a series of responsibilities that are required for trustee to execute. This can include creation of a clear investment strategy, managing the funds’ assets, ensuring contributions are made, paying out benefits to members once they’re retired, and keeping to the aforementioned regulations and compliance expectations. 
  5. Lastly, administrative tasks and the cost: To manage a SMSF there are extra costs like accounting, auditing and sometimes legal fees. In addition to engaging and funding those who provided such services, trustee must also ensure the prepare financial statements and lodge annual tax returns. 

So what are the benefits a SMSF can give you? 

Understanding your money, creating long term financial targets and goals; and being an active participant in building wealth is considered by some as the golden triangle for success. And while having an SMSF doesn't automatically grant you these things it does offer greater investment control, more flexibility over estate planning and even the ability to aggregate family wealth. By choosing to set up a SMSF you’ll be committing to building your financial knowledge and having active involvement in your financial future. 

One of the most common, sought after benefits trustees have is to purchase an investment property through their fund. In addition to some of the possible benefits of having a SMSF, there are other specific benefits to purchasing an investment property or properties using a self-managed fund. Of course, there are rules that you must abide by making the decision to do so, starting with the most fundamental one being its for investment properties only.

What are the key rules to know when buying a property with a SMSF? 

Superannuation is designed to help individuals save and accumulate funds throughout their income generating years; and it should not be a surprise that the primary intent of SMSF is no different. Therefore the rules related to buying an investment property with a SMSF strongly correlate to ensure its an asset that is generating or supporting future financial security in retirement. You will be required to guarantee that your property: 

  • Meets the ‘sole purpose test’ of only providing retirement benefits to fund members
  • Is not acquired from a related party of a fund member
  • Is not lived in by a fund member or any fund members’ family
  • Is not rented by a fund member or any fund members’ family

These ‘tests’ are applicable mostly to residential property. It should be noted that there’s a slight shift should the trustee/s of the SMSF purchase their personal business premise; in which case they are allowed to pay rent directly into the self-managed super fund - at the market rate! 

The risks vs rewards of buying investment property with a SMSF

Just like a carefully selected investment property, purchased via a standard bank loan can be a fantastic strategic lever to grow wealth, a SMSF purchased property also comes with a lot of possible benefits. The top five to be aware of are as follows: 

  1. Tax Benefits. Notable savings will include: interest on your SMSF loan, council rates, water rates, any insurance for the property, and maintenance costs. Overall they can help reduce your tax liability by deducting these property centred costs. Using the knowledge from an accountant whose expertise lies in SMSF lending will help you maximise the claimable tax deductions for a great return; and should be considered when it comes time to get tax advice. 
  2. Reduction in Capital Gains Tax. A common, often painful tax for many Australians - CGT- is applied to the profits you may make from selling assets; especially property (assuming the property is held for more than 12 months.) It is a legal requirement to pay this tax to the Australian Tax Office - having reported any such ‘gain’ in a financial year. However, when it comes to purchasing property via SMSF the CGT is capped at 10%! And if you convert your super into a pension then you’re exempt from paying any CGT at all. All up this can possibly save you a lot of money. 
  3. Acceleration of Retirement Savings. Using a SMSF to buy investment property tends to result in growing your savings faster. This comes down to both the income and capital growth from your property or properties going directly into the SMSF. Compounding over years the medium to long term impact is likely to be an overall increase in your total amount of savings resting in the super fund. 
  4. Increased Control of your Assets. A self-managed super fund gives you a lot more influence over your investment strategies - including how you diversify your portfolio. Being able to be intentional and selective about adding a tangible asset to your mix, can you give a lot more influence over the outcomes. Unlike shares which are impacted by the volatility of markets that you cannot control, being strategic about adding a property means you could add generate greater income and buy an asset with capital growth potential. The history of property in Australia in particular suggests this asset value doesnt fluctuate perhaps as much as other assets. 
  5. The Ability to Leverage. Once you have embraced and maximised the previous benefits of getting an investment property via a SMSF; you then may have the chance to leverage this asset even further. For example if you achieve capital growth and solid rental income you can utilise this to borrow against and fund additional property. 

As the Benjamin Franklin quote goes - nothing is certain except for death and taxes and so while there are clearly some great benefits to buying an investment property via a SMSF, every trustee of a of the fund should also consider the possible risks. These include: 

  • Higher costs – it is standard that SMSF property loans tend to be more costly than other property loans.
  • Cash flow – your fund must always have a sufficient cash buffer, or liquidity to meet expenses. Typical expenses include the loan repayments, insurance premiums, and other common costs such as property management. On occasion the fund may also be required to make retirement pension payments or lump sum withdrawals, and must have adequate cash allowances to cover these costs too. 
  • Loan balance - in the event of illness, disability or death of members; or short to long term rental vacancy; there must be a strategy in place to repay the loan.
  • Tax management – you can't offset tax losses from the property against your taxable income outside the fund and this should be taken into account to avoid possible losses. 
  • Strict contract – should your SMSF property loan documents and contract not get set up correctly, it’s not simple to rescind. Not being able to simply revoke the arrangement, you might have to sell the property which may cause substantial losses to the SMSF.
  • No adjustments – you are not permitted to make alterations that change the character of the property until you pay off the SMSF property loan. 

With the greater chance for reward, there are some complexities to buying an investment property with your SMSF so it is generally recommended to consult qualified professionals in the field. An accountant or a financial planner can help you set up your SMSF properly and safely and a mortgage lender or broker to support your loan requirements. And in order to maximise a positive return from buying the right investment property (not all properties generate healthy rental income, or have positive capital growth) - an investment property advisor - who can act like a buyers advocate and research, source, and secure the perfect property. At Your Property Investing, we partner with experts to provide a highly qualified team delivering an end to end, completely done for you, property investing service.