How to buy an investment property through a Self-Managed Super Fund (SMSF)

One of the unique benefits of a Self-Managed Super Fund (SMSF) is the ability to use it to purchase and hold an investment property as a means of growing your retirement savings through rental income and capital gains, taxed at a concessional rate. While there are strict rules and regulations that that must be adhered to that make it more complex than other methods of growing your super, it’s simply a question of following the steps, which is a lot easier when you understand the process.

What is an SMSF and why are people using them to invest in property? 

An SMSF is a private super fund you either manage yourself, or as part of a group of up to six members, all of whom are also trustees. In a traditional super fund, your super – as well as the super of millions of others – is managed by professional investors. In an SMSF, however, the day-to-day management of your super and growing your retirement savings is entirely your responsibility.  

SMSFs offer flexibility and control, and for people looking to take a more active role in growing their retirement savings, they can be an appealing option as, unlike other super funds, SMSFs can diversify their investment portfolio by purchasing property while making use of concessional tax rates reserved for super.  

Are there rules around what types of property you can buy through an SMSF? 

Investing in property through your SMSF comes with some great tax incentives. However, there are also strict rules and regulations from lenders about the type and location of the property and how it can be used once it’s been bought.  

For a property to be eligible as an SMSF investment, it needs to pass the Sole Purpose Test and genuinely support your retirement goals. Superannuation is compulsory in Australia, and ensuring investments made through your SMSF are for the benefit of your future self rather than to provide immediate personal benefit, is something the government takes very seriously.  

Another eligibility requirement is that neither yourself, nor any relatives of yours or others in the SMSF are allowed to live in the property or rent it from you. It also cannot be purchased by a related party. It needs to be a pure investment and rented out at the market rate, which is important as the rental forms part of your super and is taxed at a concessional rate.  

How to buy property through an SMSF: a step-by-step guide 

Once you’ve done your research and decided that investing in property is the right way to grow your super, these are the steps you’ll need to take to purchase a property through an SMSF.  

• Set up an SMSF: To buy property through your super, you’ll first need to establish an SMSF that complies with Australian Taxation Office (ATO) regulations and has a clear investment strategy. 

• Understand limited recourse borrowing arrangements (LRBA): To borrow money through an SMSF, you’ll need to enter an LRBA, which comes with certain rules you’ll need to follow. Money borrowed through an LRBA can only be used to buy a single asset and can only be used for the defined purchase and once bought, needs to be held in a separate trust, known as a bare trust, to protect the other assets held in the SMSF. Once the loan has been repaid, the property title is transferred to the SMSF. More on bare trusts in just a moment.  

• Find a suitable property: Not all properties can be bought through an SMSF, and depending on who you borrow money from, there may be other restrictions as well. You’ll need to find a property that satisfies all requirements.  

• Find a lender: Once you’ve found a property, it’s time to apply for the finances you’ll need with a specialist lender who offers an SMSF home loan. As with traditional home loans, it’s important to consider loan features such as fixed vs variable, or interest-only. If the lender offers it, it’s worth considering an offset account. Offset accounts can help reduce interest, so you can pay off your loan sooner. They can also help improve cashflow. Importantly, however, the offset can only be used for expenses directly related to the loan and property.  

• Set up a bare trust: A bare trust is a very simple form of trust. Its only job is to hold an asset until the time comes to hand it over, which in the case of an SMSF, is once the loan has been paid off. Setting up a bare trust is a requirement of an LRBA and protects the other assets in your SMSF, while still allowing your beneficial ownership of the property.  

• Provide supporting documents: As with any loan, there are certain legal checks and requirements that need to be completed to ensure you’re able to service an LRBA, and you will likely be required to supply your lender with documents such as a certified copy of your SMSF Trust Deed, your Custodian or Bare Trust Deed, and a certificate of Legal Advice. In some cases, you’ll also need to supply an investment strategy, evidence of additional contributions, a Contract of Sale and, depending on your situation, there may be other documents required too.  

• Settle and manage the property: Finally, it’s time to settle the property, rent it out and manage it, either by yourself or through a real estate agent. And don’t forget, it’s important to stay up to date with your recordkeeping as you pay off your loan and grow your retirement fund.  

Is buying property through an SMSF the right choice for me? 

While there are strict rules around purchasing property through an SMSF, these rules are in place to protect your future so you can fund your retirement. They’re also there to ensure tax incentives, such as the concessional tax rates offered for purchases made through an SMSF aren’t taken advantage of and are used for the reasons they were created: to help you grow your retirement savings.  

Rules can change and Government policies can evolve. To ensure your SMSF remains compliant, we recommend staying up to date with the latest from the ATO. If you’re uncertain about any rules or regulations around LRBAs or SMSFs, it’s important to get legal and financial advice.

How can AMP Bank help me with my SMSF? 

AMP Bank has a range of products specifically designed for members of SMSFs, such as SMSF home loans with offset accounts and high-interest saver accounts.

Thinking about setting up an SMSF? Check out our SMSF hub to learn more.