A self-managed super fund (SMSF) can give everyday Australians the ability to access a lump sum to use as a deposit for an investment property purchase.

It’s important to be aware there are risks and restrictions on doing this, and we recommend only entering into this type of arrangement after seeking the advice of a qualified Financial Planner.

This article answers some of the most commonly asked questions we receive about buying property with super, so you can determine if it’s worth exploring for your situation.

Why do people use their super to buy property?

When it comes to building wealth for retirement, those with a better understanding of property than the share market often prefer the option of direct property investment in super. To do so, you need to set up a self-managed super fund (SMSF).

It can also be more tax advantageous to purchase property within the superannuation environment. Rental income from investment properties within super is taxed at 15%. This rate also applies for capital gains tax in the first year of ownership, after which it drops to 10%. No capital gains tax is payable on the sale of a property in pension phase.

Superannuation Guarantee contributions of 9% can be used to cover any negative cash flow effects with the fund, meaning properties can usually be purchased and held without any effect on personal cash flow.

During pension phase, trustees have the opportunity to benefit from tax-free income from property rental income. No capital gains tax on the sale of a property asset is applicable during pension phase, which can help investors save hundreds of thousands of dollars.

What type of property can I buy with an SMSF?

You are able to purchase residential investment and commercial property (such as shops, business premises, offices and factories) within an SMSF.

You can invest in any property type, however there are certain considerations. Property investment within super is effective through gearing, which essentially relies on the rent paid when it is tenanted, something not generally possible with land only.

Also, the fundamental character of the property also cannot be changed while a loan is attached, thus preventing you from developing vacant land.

Can I ever live in the property (even after it’s paid off)?

No. It can’t be lived in or rented to you or your relatives, even after it’s paid off or you are retired.

How much superannuation do I need to get started with property?

This depends on the cost of the investment property being purchased. Establishment costs, a minimum deposit of 20-30%, purchase costs and a reserve of one year’s negative cash flow is needed. Take into consideration you are able to combine up to four individual members’ superannuation into an SMSF to increase the capital available.

Can I use a property manager to manage the property?

Yes. All expenses, including property management fees, are tax deductible. Remember, the idea of an SMSF to make as much money as possible, so looking for savings with property managers is important.

Is it possible to use my super to buy out an investment property I already own?

No. You are not allowed to transfer or sell a residential property to your SMSF that is owned by a fund member or any personal associated with a fund member, such as a relative.

There may be exceptions however, in the case of a commercial property that is used wholly and exclusively used by business.

Can I set up an SMSF with my partner to have a greater deposit to buy an investment property?

Yes. Approximately 70% of SMSFs have two members, however, an SMSF can have up to four members. This means you can effectively pool your assets with other parties (such as your partner) to raise the monies required.

Who pays the deposit when buying the investment property?

The SMSF pays all deposits on investment property. No out-of-pocket expenses are required by members.

Who pays the mortgage? And other expenses of the property?

The SMSF covers interest, maintenance, insurance, rates, body corporate fees, property management and any other associated property expenses. These expenses will usually be deductible to the fund.

To find out how to get started with your own investment property within super, arrange a FREE consultation with our financial planners today.