Exploring SMSFs: A Smart Strategy for Property Investment

In recent years, the use of Self-Managed Super Funds (SMSFs) for property investment has notably increased, and the average age of people establishing SMSFs has decreased. This trend reflects a broader shift in retirement planning, where much younger individuals seek more control over their future retirement and tailored investment strategies. A decade ago, SMSF was considered a vehicle for the wealthy only.   However, most clients establishing SMSF today are between 35 and 50 years old. Let’s delve into why SMSFs have become a popular vehicle for property investment and how this information might benefit your financial future.

An SMSF is a special trust, which the Australian Taxation Office regulates and that you manage yourself. Unlike traditional super funds, where investment decisions are made on your behalf by the fund managers, and you are not in control, an SMSF gives you the flexibility to decide how your retirement savings are invested. This structure requires the trustee to take responsibility and understand how the superannuation rules work.

The Australian Securities & Investments Commission reports a rise in SMSF allocations to real estate, especially in the last 12 months. Several factors contribute to the spiking popularity of SMSFs. First, the affordability level has dropped significantly outside of super. Most people are at their maximum borrowing capacity. At the same time, salary growth and superannuation guarantee increase in the last five years made superannuation balances grow organically, so more and more younger couples reach the benchmark of 150-200k between them. At $150-200K in SMSF, the fees and return become compatible with the industry or retail superannuation fund and make economic sense. For most young couples, using super is the only option to buy their first investment property or add another to the existing property portfolio.  Australians love the tangible nature of property investment and its long-term timeframe, which is consistent with the purpose of superannuation.

The primary appeal of an SMSF in property investment is control, choice of investments and the ability to borrow, thus using leverage to grow your wealth. You decide which assets (such as property) to invest in, directly influencing your portfolio’s performance. The lenders offer up to 80% LVR for SMSFs, which makes the investment purchase possible.
As a perk, on top of the control and leveraging option, SMSFs offer significant tax advantages. The maximum tax you pay on income in SMSF is 15%, reduced to 10% capital gains tax if you hold the property for more than 12 months and even 0% tax when the property is held until retirement.

Of course, there is a catch. Investing in property through an SMSF comes with strict rules. For instance, the property must meet the ‘sole purpose test’ of providing retirement benefits. The property must be under SMSF’s name; you, your relatives and “related” parties can not live in it, and you can not buy residential property from a related party. Also, diversification is crucial; relying too heavily on one asset’s performance can be risky. If you make the right decision, the gains and benefits are yours, but if you make a wrong investment decision, you might lose most of your retirement savings. Ensuring compliance and a balanced investment approach is where professional advice becomes invaluable.

SMSFs offer a unique and potentially rewarding way to invest in property, but they’re not without their complexities, taking responsibility, and strict rules to understand and follow. It’s crucial to seek expert advice to navigate the rules and optimize your tax strategy. If you’re considering an SMSF for property investment, the Easy Super team is here to guide you through every step of the process.