We are asked by clients on a regular basis whether they can use their superannuation to buy a property.

The short answer is yes as long as you or a person who is “related” to you does not live in it (unless it is a property being used in a primary production business in which case you can).

How can this be achieved?
Firstly it will be necessary to establish a Self Managed Superannuation Fund (SMSF) to give you the control that you will require over your superannuation.

The options for your SMSF to acquire property are as follows:

Outright Purchase
If you have accumulated enough superannuation your fund can buy a property outright. Unfortunately not too many people are in this position.

Tenants in Common
The next simplest option is to buy a property as tenants in common with your SMSF i.e.: Your superannuation monies are added to other monies that you may already have or can borrow (using a property other than the property being acquired) to buy the property.

The major disadvantage of this option is that it is costly for the SMSF to increase their holding in the property over time.

Ungeared Unit Trust
Another option is to establish a unit trust that is partly owned by the SMSF and yourself or another suitable family entity. As this trust must be “ungeared”, the property cannot be used as security.

The advantage of this option over “tenants in common” is that the SMSF can continue to increase its holding in the property over time.

Instalment Warrant
The other option is for the SMSF to use an “instalment warrant” to acquire the property. Under this option the SMSF can use the property being acquired as security for the borrowing (provided it complies with the rules in the legislation).

The major disadvantage of this option is its complexity and the higher level of set up costs (est. $5000 - $10,000)

What are the advantages of buying property via a SMSF?
Many people want to use their superannuation to buy property because it is their largest pool of savings and they are more comfortable with property than the sharemarket; however it is also very tax effective with the income being taxed at 15% and capital gains 10%. This is far lower than the marginal tax rate of most taxpayers and gets even better if an income stream is commenced from the fund at preservation age (currently 55 years of age) which can then exempt the fund from tax entirely.

In addition, the interest on any borrowings you may make can be used to offset your other taxable income if the investment is negatively geared.

What type of property can my SMSF acquire?
Your SMSF can acquire residential or commercial property however it can only acquire an existing property from you if it is “business real property” i.e. being used in a business. This can also include a rural property that is being used in a primary production business.

Please note this article only includes general advice and should not be relied upon without further consultation with a SMSF specialist.

If you would like to discuss your individual situation please contact Louise Morris our SMSF Specialist Advisor.