While using a self-managed super fund (SMSF) to buy and invest in property is becoming increasingly popular, it goes without saying that acquiring property this way requires careful consideration. Not only do you need to ensure this method supports your big-picture investment strategy, but you also need to comply with ASIC’s rules. To help you on your journey to successfully investing in property using your SMSF, we’ve compiled a list of the most common mistakes you need to avoid making during this process…
While your SMSF can be used for a variety of property-related purposes, including acquisition costs and repairs and maintenance, you critically cannot use borrowed funds to improve the property. ‘Improvements’ encompasses additions, granny flats and other similar extensions. For these renovation activities, only cash resources of the fund can be used.
For this reason, good record-keeping is essential when it comes to your SMSF and allows you to identify with ease whether borrowed funds or internal cash is used.
2. Associated Party Loan
It’s common for buyers to use external funds to assist them when investing in property through their SMSF by supplying the cash as a non-concessional contribution. The difficulty with this is that once contributed, you cannot recoup the funds until retirement, or even worse, you cannot commit sufficient funds within the set limits.
Works which purely return the component back to a new condition are characterised as ‘repairs’ for the purposes of the superannuation borrowing legislation. A cosmetic renovation which replaces the existing kitchen or living room is therefore permitted, even with borrowed funds.
Buyers often get themselves in a bind here when their ‘renovation’ is only to extend the bench area of the kitchen for instance or tear down a non-load bearing wall. These two examples would be classed as improvements, and consequently, require the use of internal SMSF cash. The simple remedy to this is to ask your builder to provide a split invoice which outlines the improvement as a separate piece of work.
4. Life insurance
When it comes to superannuation, it’s key to remember that life insurance premiums are tax-deductible. Avoid making the standard mistake of assuming that this is still valid when your SMSF fund has taken out a policy to repay the debt on the death of a family member. For your premium to be tax-deductible, ensure it does not relate to the specific purpose of minimising the debt.
5. Stamp duty
When the debt is minimised or ‘paid down’, the property must then be transferred from the holding trust into the SMSF. At this point, it’s important to note that many states will charge stamp duty at the full property transfer rate. Engaging with a reputable professional can go a long way towards ensuring that your SMSF is correctly worded and that you are able to make use of additional documentation safeguarding you from stamp duty traps.
Need some more information on Stamp Duty? Read our simple guide to Stamp Duty for properties.
Investing in property using your SMSF is a rewarding way to take a step up the ladder.
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