What is an SMSF?
A SMSF is a type of Trust which is usually run by either two individual trustees or one corporate trustee. It holds assets, has beneficiaries and is governed by a set of rules for establishing and operating the fund called a Trust Deed.
What is a Bare Trust?
A SMSF cannot be the legal owner of a property so a separate entity must be set up for this purpose: This is called a Bare Trust (or Security Custodian Trust). There must be a separate Bare Trust set up for each property purchased, as the law does not permit multiple properties to be held by the same Bare Trust.
The Bare Trust Trustee (also called the Security Custodian Trust Trustee) must be a company and can potentially be the same trustee to different Bare Trusts to avoid multiple companies being set up.
How is the process of buying a property through a SMSF?
The property is purchased by the Bare Trust Trustee (company) as Trustee for the Bare Trust. It is the legal owner of the property until the loan is repaid in full.
The SMSF itself is the Beneficial owner of the property (not the legal owner), which entitles it not only to the rental income, but also the responsibility for the property expenses such as rates and insurances. When the loan is repaid in full, the title of the property can be transferred from the ‘Bare Trust Trustee as trustee for the Bare Trust’ to the trustee of the SMSF. There will be no taxable Capital Gain considered by the ATO for this transfer.
The SMSF itself is the Beneficial owner of the property (not the legal owner), which entitles it not only to the rental income, but also the responsibility for the property expenses such as rates and insurances. When the loan is repaid in full, the title of the property can be transferred from the ‘Bare Trust Trustee as trustee for the Bare Trust’ to the trustee of the SMSF. There will be no taxable Capital Gain considered by the ATO for this transfer.
Whilst the legal owner and the borrower are not the same entity, the SMSF will borrow the funds and the lender will be allowed to use the purchased property as security over the loan. The loan must be a Limited Recourse loan which means that, if the SMSF defaults on the loan, the lender can only repossess or sell the specific property secured and may not use any other SMSF assets if a loan shortfall exists.
What are the benefits of buying property through an SMSF?
Purchasing a property through a Self-Managed Super Fund (SMSF) can offer several advantages, particularly for individuals looking to enhance their retirement savings through property investment. Here are some key reasons to consider buying property through an SMSF:
1. Tax Benefits
- Concessional Tax Rates: Rental income from the property is taxed at the concessional SMSF rate of 15% during the accumulation phase, compared to higher personal income tax rates.
- Capital Gains Tax (CGT) Discounts: If the property is held for more than 12 months, any capital gain is taxed at a reduced rate of 10% during the accumulation phase.
- Tax-Free Income in Pension Phase: Once the SMSF members enter the pension phase, both rental income and capital gains can become tax-free.
2. Leverage and Growth
- Borrowing to Invest: An SMSF can borrow money to purchase property, allowing the fund to leverage its assets and potentially increase returns.
- Capital Growth: Real estate can appreciate in value over time, contributing to the growth of the SMSF’s assets and enhancing retirement savings.
3. Diversification
- Investment Portfolio: Adding property to an SMSF can diversify its investment portfolio, reducing risk by spreading investments across different asset classes such as shares, bonds, and property.
- Stable Income Stream: Rental income from the property provides a steady and predictable income stream, which can be particularly beneficial in retirement.
4. Control and Flexibility
- Direct Control: SMSF trustees have direct control over the investment decisions, including the selection, management, and sale of the property.
- Tailored Investment Strategy: Trustees can tailor the investment strategy to meet their specific retirement goals and risk tolerance.
5. Asset Protection
- Creditor Protection: Assets held within an SMSF are generally protected from creditors in the event of bankruptcy, providing an additional layer of security.
6. Estate Planning
- Beneficiary Nominations: SMSF trustees can nominate specific beneficiaries to receive the property or its proceeds, allowing for more precise estate planning.
Considerations and Potential Drawbacks
While there are significant benefits to buying property through an SMSF, there are also important considerations and potential drawbacks:
1. Complexity and Costs
- Setup and Running Costs: Establishing and maintaining an SMSF involves significant costs, including setup fees, annual audit fees, and ongoing administrative expenses.
2. Compliance and Regulations
- Strict Compliance: SMSFs are subject to strict regulations and compliance requirements under Australian superannuation law, and non-compliance can result in severe penalties.
- Sole Purpose Test: The property must be used solely for providing retirement benefits to members, which means it cannot be used for personal use by members or related parties.
3. Liquidity Issues
- Illiquidity of Property: Real estate is a relatively illiquid asset, and selling the property quickly to meet fund obligations or pay benefits can be challenging.
- Diversification Risk: Over-concentration in property can lead to reduced diversification, exposing the fund to property market fluctuations.
4. Market Risks
- Property Market Volatility: Property values can fluctuate, and there is no guarantee of capital growth. Rental income is also subject to market conditions and tenant occupancy.
Why Choose us?
- Specialised Expertise: We have extensive experience in managing SMSF loans, ensuring a seamless and compliant process tailored to your specific needs.
- Access to a Wide Lender Network: Our broad panel of lenders includes those specializing in SMSF loans, offering competitive rates and flexible terms.
- Personalized Service: We take the time to understand your financial goals and provide tailored solutions that align with your retirement strategy.
- Comprehensive Support: From initial consultation to loan settlement, we guide you through every step, simplifying complex processes and handling all the paperwork.
- Dedicated SMSF Loan Experts: Our team of specialists stays updated with the latest regulations and market trends, ensuring your SMSF loan is structured for optimal tax efficiency and compliance.
- Transparent and Honest Advice: We prioritize transparency, offering clear, unbiased advice to help you make informed decisions without hidden costs or surprises.
Apply for an SMSF loan with Gold Finance
At Gold Finance we can help you to secure the highest amount of loan for your SMSF without any liquidity requirement. Speak to us about your SMSF loan. Call 0415 571 893 or fill in our free online enquiry form today.
