Can I borrow and buy property inside a SMSF?
by Peter Switzer
I am in my early 50s and we have paid off our house and we want to buy an investment property as we have surplus savings as we both work and pay a considerable amount of tax. I have been advised that we can borrow to buy and renovate a property inside a SMSF and that it could be tax-effective, especially if you wanted to live in the property after we retire. Is this right?
There are a number of issues here — some right but some wrong depending on how you interpret it.
First, I think it can be very tax-effective to buy a property inside your super fund for a couple of reasons. The best reason is that arguably if you held the property until retirement, you could withdraw the house as a lump sum payment. You would avoid capital gains tax, as a fully retired person who has met the right age for a release of super for a pension is in the no tax zone.
Be clear on this, you could not live in the house while it is in the SMSF but you could let it out to someone just like with an investment property outside of super. The SMSF can claim the tax deductions of interest and the costs of the services such as real estate agent fees.
You can borrow to buy the property but you might need a bigger deposit than with a loan outside of a SMSF but you can’t use borrowed funds to renovate the property — you must use money inside the fund.
Another tax advantage is that you can salary sacrifice into your SMSF and use this money to pay off the loan more quickly. If you try to pay off an investment loan for a property using post-tax dollars that could have been taxed at 46.5 per cent compared to the 15 per cent tax on salary sacrificed money in your SMSF, you can see that you would pay a loan off a lot quicker inside a SMSF. If you want to know more about this, have a look at www.switzersuperreport.com.au, which has a resource centre that tackles these thorny super questions.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.