It’s becoming increasingly popular for Baby Boomers to use their Self-Managed Super Fund (SMSF) to purchase investment property. However, when doing so many investors make errors.
We’ve recorded the 6 most common errors individuals make when using super to purchase property.
1.Debt and SMSF
Self-Managed Superannuation Fund (SMSF) can borrow funds to:
- a) Purchase a property
- b) Pay for repairs
- c) Capitalise interest
You will not be able to use borrowed cash to make any improvements to the property. Any improvements must cash resources instead.
Along with the legislative requirements, there are other practical reasons why a person really doesn’t want to hold their property in SMSF. When in doubt, visiting ATO’s website for regular updates of SMSF regulations is a great place to start.
Many people use external funds to help them in buying property in their SMSF by adding the cash as a non-concessional contribution.
The main issue with this is that once you’ve contributed, you are not able to get any of the funds back until your retirement or possibly worse. However, you do have the option to lend funds to your superannuation which allows it to be released if it has been refinanced and there is a limit on the loan amount.
Additionally, the loan amount must meet all limited recourse borrowing requirements as per the legislation and must clearly outline all of the terms and conditions.
Some cosmetic renovations can be considered repairs and are allowed under the superannuation borrowing legislation; however, many people make the mistake of improving their kitchen by extending the bench area or by knocking down a non-supporting wall. These two types of renovations are considered to be improvements and only internal SMSF cash can be used.
It is possible to ask the builder to split an invoice to show which improvements were made using borrowed funds and which ones were funded with cash.
If you aren’t sure if you can make home improvements using a loan, visit ATO’s website or consult with a Sunshine Coast loan specialist to help point you in the right direction.
The house must be transferred from the placing trust in to the SMSF when your debt has been reduced. A full stamp duty at the full property transfer rate is charged in quite a few states. To avoid this trap, additional documentation can be used at the time of sale.
5.Purchasing from a Connected Party
It is possible for the SMSF to purchase property from a non-related third party, but it is not possible for it to be used to purchase residential property from a member or a related person of a member. However, it can purchase listed shares and commercial or industrial property from a member.
Expect there to be a CGT and stamp duty consequences on the sale, but most states permit a minimum stamp duty if the property is in the individual’s name and if they are an SMSF member.
If you’re looking for ways to purchase investment property and would like to speak with an SMSF advisor on The Sunshine Coast, simply make an obligation free appointment with us.