In 2010, a change to the rules allowed a Self Managed Super Fund (SMSF) to borrow money to invest in property assets. Before the rules changed, direct investment in a property via a superfund was rare because few of us had enough money in our super to purchase a property outright. Now the rules have changed, more people are setting up their own SMSF.  And more people with an SMSF are turning to the perceived safety of bricks and mortar because the share market is proving to be an unpredictable way of making your super grow for retirement. But whilst the new rules make it easier to borrow in super, there are still some restrictions regarding purchasing a property with a SMSF. (Setting up and administrating a SMSF can be complicated. So it is very important that you seek advice from a professional accountant or financial planner before you decide to take this route.) Why is it considered a good idea? If you purchase an investment property outside your super, you will be required to pay capital gains tax when you sell it to fund your retirement. Additionally, if you're thinking about retiring on the rental income of such investments, you will pay tax at the full rate on that income even if you're retired. Holding the same property within a super fund could reduce the tax to zero if you sell it once you start drawing down a pension. Additionally, any rental income is only taxed at 15 percent – and not taxed at all if you are drawing a pension. Buying an investment property through your super could also help you pay it off faster. All the rent and your super contributions can go towards paying down the loan. You could also pay down your SMSF property by ‘salary sacrificing' whilst you are working, giving you additional tax benefits. Additionally, maintenance and upkeep costs are also tax deductible within your super. What are the drawbacks? You are not permitted to live in an investment property you purchase with your SMSF. However, you are allowed to use your SMSF to purchase business premises for your company. Other restrictions include development of the investment property. Whilst you are allowed to maintain and refurbish the property, you are not allowed to develop or change it in any significant way. This means that buying a property, developing it and turning it over for a quick profit is not an acceptable investment for a SMSF. You also can't plan to profit by making a sub division.  Property investment under your SMSF is a long term proposition. It is also important that any property investment from your SMSF is paid off before you stop working – otherwise the loan will have to be repaid from your super's other investments and that could leave you short of an income if you don't plan correctly. How do you go about borrowing for a SMSF? There are rules about the type of loan you can use to purchase property through your SMSF. You are required to use a Limited Recourse Borrowing Arrangement – which means that the property itself is the security for the asset. No other assets – either within or outside your super fund – are allowed to be used as security for the loan. Generally speaking, you can borrow 65 – 70 percent of the property value using your SMSF. So for a $400,000 property, your superfund would need to provide $140,000 in cash for a deposit. There is also the additional expense of setting up your SMSF, which could cost as much as $3,500. Sometimes lenders will charge 2 – 4 per cent more for an investment loan inside your super because of the complexity of the arrangement. However, we are experts at locating the right loan for your needs and can shop around with a variety of lenders to get you the best deal. Talk to the professionals If you're thinking about setting up your own SMSF to purchase property, or if you already have a SMSF and would like to invest, the legal intricacies are quite complex and you will need expert advice to do it properly. Getting it wrong could incur harsh penalties – you could be taxed as much as 46.5 per cent on your super's assets if it is not set up and operated correctly. But get it right and it could make the difference to your retirement income objectives! Once your SMSF is set up, talk to us about getting a competitive loan for your SMSF property investment. We'll be happy to help.

Back to Newsroom