Purchasing Property Through A Self-Managed Super Fund

Since changes to superannuation legislation in 2007, which allowed for self-managed super funds (SMSFs) to borrow money for property assets, there has been a dramatic increase in the number of people setting up a SMSF in order to purchase an investment property.  Whilst there are many benefits to this, there are strict rules which must be followed.

The primary benefit of purchasing property through your super fund is the potential tax benefits.  For example, where an investment property is purchased outside of super and then sold to fund your retirement, the sale will be subject to capital gains tax.  If you were to purchase the same property through your SMSF, the tax burden could potentially be reduced to zero provided the property is sold after your super fund switches to pension phase.  If the property is sold by before you retire a maximum 10% capital gains tax is payable, provided the property has been owned for at least 12 months.  This could result in savings running in the tens of thousands of dollars.

Alternatively if you continue to rent out the property during the pension phase the rental income is only taxed at 15 per cent, rather than your personal tax rate.

It sounds simple right?  Unfortunately there are a couple of negatives that you need to be aware of.  Firstly setting up a SMSF can be a costly and complicated process.  On top of this when borrowing lenders typically will only lend around 65-70% of the purchase price to a SMSF and often charge a higher interest rate.

The loan must also be what is termed a non-recourse loan, meaning that the property itself must be the only asset provided as security for the loan. On top of this a SMSF cannot develop or improve a property that has a mortgage over it, with the loan having to be fully paid out before any improvements to the property can be made.

The property is also subject to the sole-purpose test, meaning that it must be owned purely for the purpose of investing for retirement, so it can’t be lived in, used as a holiday home or rented by a member of the SMSF, or any related parties of a member.

The safest bet is to ensure that you have the capacity to fully pay out the mortgage on the property prior to retirement; otherwise servicing the loan could prove difficult.

It is important to seek financial and legal advice before purchasing an investment property through a SMSF as the ATO watches these types of investments very closely.

Call us at Icon Legal on (07) 3399 6006 if you would like advice about purchasing a property through a self-managed super fund.

Great Start Grant

If you’re a first home buyer it may be worth investigating the possibility of obtaining a Great Start Grant. This grant is an initiative of the Queensland Government designed to help new home buyers afford their first home sooner. It provides first home buyers with a grant of $15,000 towards the purchase of a new home in Queensland valued at less than $750,000.

A new home is a property that has:

  1. not been previously occupied as a place of residence and has not been previously sold as a place of residence; or
  2. been substantially renovated, provided that the sale of the property is a taxable supply as a ‘new residential premises’[1] and that the renovation meets the requirements of a substantial renovation.

For a property to meet the criteria of a substantial renovation, all, or most of the structural and/or non-structural components must be replaced.  For example the foundations have been altered, the interior has been reconfigured with new walls, flooring and windows in place, or the roof has been lifted or replaced.  A substantial renovation can also include non-structural work such as the replacement of the buildings wiring and/or plumbing and the plastering or rendering of a majority of the property’s walls.

To be eligible for the grant you must meet the following criteria:

  1. Be at least 18 years of age;
  2. Be an Australian citizen or permanent resident;
  3. You or your spouse must not have previously owned property in Australia;
  4. The property must be a new home; and
  5. Its value must be under $750,000.

If you meet the above criteria then you should look to apply for a Great Start Grant. In receiving the grant you must move into the new home within a year of settlement and live in it for at least 6 months.

Call us at Icon Legal on (07) 3399 6006 if you would like advice about purchasing a property or more information about the Great Start Grant.

[1] A New Tax System (Goods and Services Tax) Act 1999 (Cth) s 40-75(1)(b).