Use your Super for Property Investment (SMSF)

How to Set Up an SMSF and Use It to Invest in Property

Setting up a Self-Managed Super Fund (SMSF) is an effective way to take control of your retirement savings, particularly if you want to invest in property. While SMSFs offer flexibility, they also come with strict compliance requirements and a structured setup process. Here’s a step-by-step guide to establishing an SMSF and using it to purchase a property.

Step 1: Ensuring You Have Enough to Get Started

– To invest in property through an SMSF, you need to consider the costs and required capital: A balance of around $150,000 is generally enough to get started and funds can be pooled with other members such as a partner

– Lenders typically require 20% deposit plus additional costs like stamp duty, legal fees, and ongoing SMSF compliance costs. For a ~$500,000 property purchase, an SMSF should have at least: $150,000 in super (to cover deposit, stamp duty, incidentals and other costs)

– Before setting up any structures, it would be best to consult with your mortgage broker to see if it is a viable option by calculating borrowing capacity as remaining amount for the property purchase will be covered through a loan

Step 2: Understanding the 4 Key Entities in an SMSF Property Investment

When an SMSF purchases property using borrowed funds, a specific structure is required to comply with Limited Recourse Borrowing Arrangement (LRBA) rules. The structure generally involves:

1. SMSF Trustee: Manages the fund and ensures compliance with superannuation laws.
2. SMSF (Super Fund): Holds cash and other assets but cannot directly hold the property if borrowing is involved.
3. Bare Trust (Holding Trust): A separate trust set up to legally hold the property on behalf of the SMSF until the loan is repaid.
4. Property Trustee: A company that acts as the legal owner of the property under the Bare Trust structure.

Step 3: Establish the SMSF and Its Structure

To set up an SMSF, you’ll need to:

Choose the Fund Structure:
– SMSFs can have up to six members, who can pool their superannuation balances to invest together.
Most SMSFs are structured as a corporate trustee (recommended for asset protection and succession planning) or an individual trustee arrangement.

– Create the Trust and Trust Deed:
The SMSF is a trust, meaning it requires a trust deed outlining the fund’s rules and investment strategy.

– Register the SMSF with the ATO:
The fund must be registered with the Australian Taxation Office (ATO) and obtain an Australian Business Number (ABN) and Tax File Number (TFN).

– Set Up a Bank Account:
A separate bank account is required for all SMSF transactions, ensuring clear separation from personal finances.

Roll Over Existing Super:
– Members can transfer their existing superannuation balances into the SMSF to begin investing.

Step 4: Purchasing the Property
Develop an Investment Strategy:

– The SMSF must have a documented investment strategy that aligns with its risk profile and retirement goals.
– Secure SMSF Loan (if borrowing): SMSF loans are available but come with stricter lending criteria than standard home loans.

– Purchase Through the Bare Trust: The Bare Trust holds legal ownership, while the SMSF benefits from rental income and capital growth.

– Maintain Compliance and Ongoing Obligations: The SMSF must remain compliant with ATO and ASIC regulations, including annual audits and financial reporting.

Final Thoughts
Setting up an SMSF to invest in property can be a powerful wealth-building strategy, but it requires careful planning, compliance, and financial viability. If you’re considering this strategy, professional advice, which is crucial to ensure compliance and maximise benefits.

Would you like to explore whether an SMSF property investment suits your financial goals? Get in touch with us today!