Pros and Cons Of SMSF Property Investment

CANSTAR
27 August 2013
Australians have a love affair with property and the changes to borrowing rules within superannuation over the past few years have significantly widened the availability of property investment through a SMSF. However the investment strategy is not for everyone. Here are a few general pros and cons to be aware of:

Pros

  • It can be tax-effective. As the preferred vehicle for retirement savings, superannuation receives concessional tax treatment. The earnings within your superannuation fund are taxed at only 15% – which is less than half the marginal tax rate paid by the majority of workers – and the earnings within the pension phase are tax free.
  • It provides you with purchasing power. Your savings outside the superannuation environment – or even your individual savings within superannuation – may not be sufficient to invest in direct property. Combining your capital with the other members of your SMSF, though, may give you the purchasing power you need to invest.
  • Business benefits. While you cannot purchase a residential property to rent back to yourself, or to any related party of a SMSF member, you can purchase a commercial property to lease back to your own business – provided you pay a commercial rate of rent.
  • It provides you with control over your investments. Many investors relish having control over the investments they buy and the ability to “add value” to their investments via renovation or development (please note as a side issue that the ATO does not permit SMSF trustees fund renovation or development via borrowings).

Cons

  • Your SMSF may lack diversification. Diversification – the concept of not having all your eggs in one basket – is more difficult to achieve if your SMSF owns just one or two large assets. That lack of diversification may not be in the best interests of the SMSF members.
  • You cannot benefit personally from the property. Investments within a SMSF must be purchased via an ‘arm’s length’ transaction and must be maintained on a strict commercial basis. As such you cannot purchase from, sell to, or rent to a related party. Learn more about buying property with your SMSF.
  • You may lack sufficient cashflow. While you can borrow to buy property within a SMSF, you cannot borrow to build or improve the property. Ensure that your level of contributions, plus the rental income, will be sufficient to cover any costs that you will need to meet from cash.
  • Liquidity at retirement. When your superannuation transfers to the pension phase you will need to ensure that you have built up a sufficient amount of cash to fund the required pension payments without risking a fire sale of the property.

Finally: there are many small details to be aware of when to comes to investing within a SMSF. So do your research and please ensure that you get professional advice, and assistance from SMSF administration where necessary.

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