There could be several benefits of buying property through an SMSF and these include:
- Tax savings: if you buy and hold property within your SMSF until you retire and start taking a pension from your fund, it will generally be exempt from capital gains tax when the fund sells the property. Also, any income received by your fund (ie rent received) while you are drawing a pension will be completely tax free. Before you start to draw a pension from your SMSF, any rental income generated will be taxed at a maximum of 15%. And, if the fund sells the property after holding it for at least one year, your fund will also only pay capital gains tax on the sale of the property of up to 10%. Comparatively, if you were to buy the same property in your own name, rental income would be taxed at your personal tax rate (which could be as high as 46.5%). This would also apply to any capital gains tax payable on the sale of the property (albeit after receiving a 50% reduction if the property was held more than one year).
- You may not be able to afford to buy property in your own name: however you, and other members of the fund, might have a reasonable amount of combined super saved inside your fund. Buying property in your fund might be a good way to achieve your goal of owning an investment property or owning your own business premises.
- Benefits for business owners: if you own your business premises through your super fund, and you lease it to your business, you will need to pay rent to your superannuation fund which is generally tax deductible to your business. Given the relatively low concessional contribution limits that are currently available, paying rent to your super fund could be a great way to accelerate your retirement savings without going over the contribution limits.
- Asset protection: assets held in a superannuation fund (including property) are generally protected from creditors in the event of bankruptcy. However, before you decide to invest in property through your SMSF, there are several things you should consider. These include:
- Investment strategy: any investment made by your SMSF must align with its investment strategy.
- Diversification: property generally has a significant value and may reduce diversification in your portfolio, depending on the value of your fund’s other investments and what asset classes those investments are in.
- Liquidity: the nature of property could make it difficult to dispose of quickly. You should check whether your fund is sufficiently liquid and able to pay expenses and benefits as and when the need arises without having to sell the property at short notice.