By Felicity Simpson

13 October 2014

Self-managed superannuation funds (“SMSF”) are becoming a common vehicle to invest in real estate particularly for residential real estate. The income of an SMSF is taxed at the rate of 15% however any income derived by the SMSF whereby it qualifies to be in pension phase is exempt from income tax altogether.

In addition to income tax benefits, there are also capital gains tax benefits in using an SMSF to purchase real estate whereby capital gains tax is at a maximum rate of 15% and once the SMSF reaches the pension phase, there will be no capital gains tax payable.

There are therefore compelling reasons to consider using an SMSF for the purchase of real estate but the advantages and disadvantages must be carefully considered.

To purchase real estate in a SMSF, the SMSF either has to have all the funds available for the purchase price, or if it wishes to borrow funds, there are very strict guidelines for such borrowings. These must be considered before a Contract of Sale & Vendor’s Statement is signed.

Borrowing by an SMSF requires that the real estate is purchased by a separate entity and such entity must enter into an agreement to hold the property as bare trustee for the SMSF. It is the separate entity that borrows for the purpose of purchasing the real estate. It is a specific requirement that the security for the borrowing is to be limited to the single asset being acquired and that no other assets of the SMSF can be placed at risk (this is called a limited-recourse loan). The bank may also require a personal guarantee to be provided. The loan is different to the usual loan that a bank will provide.

It is important to note that once the SMSF has purchased the property, it cannot change the nature of the property and cannot borrow further funds for this purpose. In addition, if an SMSF purchases residential real estate, such property cannot be lived in by a member of the family. It is also important to be aware of what the SMSF can do so that there are no breaches. Any breaches may results in the SMSF becoming non compliant and its assets being taxed at a much higher rate (up to 46.5%).

One must also be aware that there are additional expenses in establishing the SMSF and the structure for the purpose of borrowing. These should also be considered before proceeding to purchase.

From an estate planning perspective, the advantages are similar to any other asset acquired by the SMSF and dealt with in accordance with the appropriate regulations and the provisions of the trust deed.

It is important to note that assets which form part of an SMSF are not dealt with by your Will and that any assets in the SMSF must be specifically dealt with in accordance with the appropriate legislation and the provisions of the trust deed governing the distribution of any assets of the SMSF.

It is common to prepare a binding death nomination in respect to such distribution and this must be carefully considered at the same time that the Will is made taking into account any trusts or entities which are owned or controlled by the Will maker. The nomination will usually nominate a specific person or entity who will be entitled to the assets of the superannuation fund. This all forms part of estate planning discussions.

 

For more information please contact Felicity Simpson or a member of our Commercial Law Team.

Related Articles

View All
Commercial Law / Commercial Contracts & Agreements / Employment Law

Payroll Tax – Medical Centres and Contracted Practitioners

  The recent SRO Ruling (PTA-041) on 11 August 2023, confirms the SRO’s stance on the payroll tax obligations of...
Read More
Commercial Contracts & Agreements / Employment Law / Litigation & Dispute Resolution

New Limitations On Fixed Term Employment Contracts – Employers need to know what they don’t know!

As of today (6 December 2023), there will be new rules that impact the use of fixed term employment contracts These are...
Read More
Employment Law / Litigation & Dispute Resolution / Commercial Contracts & Agreements

Real Estate Agent Commission Victory shakes up Fair Entitlements Guarantee (FEG) Scheme

Tisher Liner FC Law has been acting on behalf of one such ‘eligible employee’ over the past three (3) years Our...
Read More
Employment Law

Navigating Employment Law Changes – What Employers Need to Know Mid 2023 Part 2

As we enter the latter half of the year, it is imperative for employers and businesses to remain updated on the...
Read More
Employment Law

Navigating Employment Law Changes – What Employers Need to Know Mid 2023 Part 1

As we approach the halfway mark of the year, significant changes are underway in Australia’s employment law...
Read More
Commercial Law / Employment Law / Litigation & Dispute Resolution

International Women’s Day 2023: Embrace Equity

Have you ever wondered why the hallmark colours of International Women’s Day are vibrant purple, bold green and stark...
Read More
Employment Law

Employers Beware! – Minimum Wage increases take effect tomorrow

National Minimum Wage increase The Fair Work Commission has announced the National Minimum Wage (‘NMW’) will...
Read More
Employment Law

Psychiatric injury due to prolonged workplace trauma – a warning for employers from the High Court!

The much anticipated High Court decision of Kozarov v State of Victoria [2020] VSC 78 (Kozarov) has provided much...
Read More
Employment Law / Small to Medium Enterprises

Boosting workplace vaccinations – who needs a third dose?

What are the new vaccine mandates Beginning 12 January 2022, workers over 18 years of age in essential fields, unless...
Read More
Employment Law

‘R E S P E C T’- Part 2 – find out what it means…..for women

As foreshadowed in our previous article, the Federal Government has succumbed to public pressure and taken much needed...
Read More
Employment Law

Superannuation Increase – Who wears the cost?

From 1 July 2021, a superannuation (super) increase from 95% to 10% of employee’s ordinary time earnings will occur...
Read More
Employment Law

‘R E S P E C T’- find out what it means…..for employers

On 8 April 2021 the government publicly endorsed recommendations of the Respect@Work Report, commissioned by the Sex...
Read More