3 SMSF property investment myths busted!
Buying an investment property through self managed super funds (SMSFs) has become a very popular wealth creation tactic for many Australians. The chance to secure a valuable asset through retirement funds while producing many tax benefits is attractive for many, especially after recent growth in the property market.
However, as using SMSFs to purchase a Queensland rental property is still a rather new avenue for investors, many people may not be well versed in the ins and outs of this type of investment.
Before using your SMSF to buy a property, it's crucial you obtain the right property education to ensure you're investing in accordance with the law and using the best strategies for your fund. The topic can be complex for new or even some seasoned investors and there are many myths that buyers can believe to be true.
Here are three SMSF property investment myths that have been busted.
1. I can live in my SMSF rental property
Many people can think they can live in their own SMSF investment property or allow friends and family to rent the home from them. However, the Australian Taxation Office (ATO), which governs SMSF investment, states that property purchases must be made at an arm's length. You won't be able to buy the home of a friend or family member either, so any property you wish to invest in must be bought from an unrelated party. This rule is strictly enforced by the ATO so that fund members do not benefit from the investment until they retire.
2. I can't be penalised for breaching the sole purpose test
The sole purpose test is there for a reason: To ensure that the SMSF is used to benefit members once retirement has been reached. Some people may think that a breach in this area may go unpunished, but the consequences are actually quite severe. If a fund breaches the sole purposes test, members could face civil or criminal penalties, and could even lose their special concessional tax benefits. Not only could this affect your life through criminal penalties, but your retirement fund, too.
According to the ATO, one of the most common breaches of the sole purpose test include providing benefits to a member, pre-retirement.
3. I can perform any renovations I want to add value to my home
A property's value is always on the forefront of any investor's mind, and a lot of owners are constantly looking for ways to boost capital growth. One such avenue is through renovations, and some investors may think they can simply do-up their SMSF property in order to increase its value. Unfortunately, this is not allowed by the ATO if your property is geared. A geared property is one that you have borrowed money to purchase and is a very common scenario for most SMSF property investors.
Rules set out by the ATO state that an owner may use super funds to make repairs to their property or maintain it. But when it comes to making improvements for the purpose of adding value to it, this must be paid for out of your own pocket.
Is SMSF property investment for me?
Choosing to invest in property using an SMSF is a decision that should not be made lightly. The process is heavily regulated by the government and members of the fund must have the knowledge and time to dedicate towards managing their SMSF.
However, SMSF investment offers many benefits to keen and financially savvy investors. One of these includes access to tax concessions while the fund is in pension phase.
To avoid mistakes surrounding the above myths, it's crucial you do your research and consult with a wealth coach who knows the ins and outs of SMSF investment and how to get you to reach your goals.