SMSF Property Ownership

An SMSF has long been able to buy real estate and rent it to a business operated by its members. This is a classic asset protection strategy that can also provide taxation savings on the rent paid to the SMSF. The operating business gets a tax deduction at the company or personal tax rate, but an SMSF pays a maximum of 15% (and sometimes lower).

An investor with an SMSF can also own an investment property that is not rented to related parties. This can have taxation advantages because of the difference between the income tax paid on rents and the capital gains tax on sale, compared to personal or family trust ownership.

SMSF Borrowing for Real Estate Purchases

The historical prohibition on investors borrowing money through their SMSF to acquire investments has been removed and replaced with some complex requirements.

The requirements include the type of holding structure for the property, uses that can be made of borrowed funds, and how many assets can be acquired. There are also restrictions on construction and development activity that can be undertaken by an SMSF.

While these rules are an additional layer of complexity for SMSFs, the potential benefits could be significant. The new rules allow trustees to access the advantages of real estate ownership through an SMSF without requiring the SMSF to pay cash for the property.

The decision on SMSF, personal or family trust ownership of real estate needs careful consideration. An SMSF pays low or no capital gains tax but has limited benefits from negative gearing. This is because it saves a maximum of 15% tax on real estate rental losses.

Rands Advisory Group can help evaluate real estate purchases so that the SMSF is utilised appropriately.

While borrowing by an SMSF is allowed, there are limited lenders making funds available. Those who do provide such loans can have high costs and extensive requirements.

Rands Advisory Group can help SMSF trustees identify lower-cost and lower-complexity lenders and assist trustees in putting together the requirements for geared SMSF ownership of real estate.