While all types of superannuation funds are able to, and often do, hold various forms of property investments, it is generally only a self-managed superannuation fund that gives you the ability to hold the direct property of your choice – and the possibility of using the same property in your business.
Owning property through your SMSF typically involves the fund holding a residential or commercial rental property that is leased to unrelated tenants, or indeed it could involve the fund holding the business premises through which you run your own business.
There are a number of advantages to holding property inside an SMSF, as opposed to owning it in your own name.
Where you hold an investment property in your own name, tax will broadly be payable based on your personal rate of tax, which could be as high as 46.5%. Similarly, if you were to hold an investment property through a company, the tax rate is 30%.
Due to the concessional tax rate that applies to superannuation investment earnings, rent received by your SMSF will be taxed at a maximum rate of 15%. And, because certain expenses related to the ownership of the property such as land rates, property maintenance etc will generally be tax deductible to the fund – the effective tax rate may come down even further.
Special superannuation tax rates also apply to any capital gain made as a result of an increase in the property's value. As a result, depending on when you decide to sell the property, any capital gain your fund makes on the sale of the property may be completely tax-free.
In addition to the above, where the property owned by your SMSF is the property from which you run your own business, superannuation rules require your business to pay a commercial rate of rent to the fund – providing you with a way to accelerate your superannuation savings.
The rent that your business pays into your SMSF will be tax deductible to your business, but more importantly for superannuation purposes, it will not be treated as a superannuation contribution.
Because the tax benefits available on superannuation contributions are currently limited to $25,000 a year, or $50,000 if you are aged 50 and over1 , the ability to make tax deductible rent payments into your superannuation fund – without this rent counting towards these limits – enables you to build your retirement benefits quicker and tax efficiently.
Depending on your personal circumstances, there could also be other benefits from holding property within your SMSF.
For example, superannuation assets are generally protected from creditors in bankruptcy situations. So, in the unfortunate event that you fall on difficult times, holding property within your SMSF may provide you with some added protection.
Further, if you are a small business owner, superannuation assets are not included when determining your eligibility for the generous small business CGT concessions that apply when you sell your business or retire. By planning ahead, you can ensure that you better qualify for these concessions.
There are a number of ways that an SMSF can acquire a property. Firstly, where the fund has sufficient money available, it could simply buy the property. This transaction is similar to you buying property personally or through any other business structure.
Where the fund does not have sufficient money readily available, the fund is able to borrow money to purchase the desired property. Although, it should be noted that there are special rules surrounding any borrowing through your SMSF.
Finally, if you already own property, as long as it's considered business real property (discussed later), you can either sell it to your fund or simply transfer it into your SMSF by way of an in specie contribution. Because an in specie contribution is simply a superannuation contribution that is made using an asset (rather than using money), you need to keep a close eye on your contribution limits to avoid incurring unnecessary tax penalties.
And, regardless of which approach is most suitable to you, it is important to make sure that all transactions are conducted and recorded based on market values and on commercial terms – especially when acquiring property from a related party.
When an SMSF is considering the acquisition of a property – regardless of whether it is by way of purchasing the property or transferring property in specie – there are a number of superannuation and tax rules to be aware of.
Generally, an SMSF cannot acquire an asset from a related party. A related party includes yourself, a relative, and your business among others. However, this rule does not apply when dealing with property that is classified as business real property.
A business real property is one that is used wholly and exclusively in a business – regardless of zoning, and regardless of who is running the business i.e. it need not necessarily be your own business. So, while you can't simply transfer your current residential rental property into your SMSF, if you own property that is used in a business, you can transfer this into your fund.
When transferring property into your SMSF, you may be liable for Capital Gains Tax (CGT) and possibly stamp duty costs upon transfer. Having said that, if you currently own your own business premises, and you're considering the possibility of transferring it into your SMSF, there are a number of Small Business CGT Concessions that may be available to help manage the CGT on transfer to your fund. There may also be stamp duty concessions available depending on the relevant state, your circumstances, and the way that your fund is structured.
Once a property is owned by an SMSF, there are also rules that relate to the use of that property. In short, the property cannot be used by you personally, unless it meets the business real property requirements mentioned earlier. So, while your SMSF can lease an office or a warehouse to your business, we may need to shelve any ideas of buying your own holiday home down the coast through your SMSF.
Also, where you decide to operate your business thorough premises owned by your SMSF, it is important that a commercial rate of rent be paid to your fund. This makes it particularly important to conduct a thorough analysis of your business cash flows to ensure that you are not placing an unnecessary burden on your business.
The diagram below shows a typical example of a business real property transfer involving an SMSF and a related business entity:
With so many possibilities and different ways of implementing these arrangements, it is important that you plan well ahead to maximise the benefits of property ownership through your SMSF.
1Under current legislation this $50,000 limit is set to reduce to $25,000 from 1 July 2012