From a tax perspective, your self-managed superannuation fund (SMSF) is a good place to make property development profits, provided you won’t need to access the money until retirement.
The downside is that it also involves cutting a path through a jungle of complex tax and legal regulations, all at the risk of being penalised or taxed into ruin if you breach the regulations.
Simply getting property into your SMSF can be a challenge. Your SMSF deed must permit the proposed activities, after which you need to take into account the relevant property market risks along with the costs of complying with SMSF regulations. Then, if you are allowed to borrow, the potential lenders will need to understand and be comfortable with your proposed arrangements.
Your SMSF must be run for the sole purpose of providing superannuation benefits for its members, based on a rational investment strategy. For this reason, the following activities are not permitted:
Lending money or provide financial assistance to a member or relative.
Intentionally acquiring assets from related parties (though there are some exceptions, such as property that is used wholly or exclusively in a business and where the in-house asset test is satisfied).
Borrowing money (except for Limited Recourse Borrowing Arrangements, which are used solely for the acquisition of a single asset, being a commercial or residential property).
Charging benefits or assets.
Undertaking transactions that are not at an arm’s length. An arm’s length transaction is one in which the parties are acting independently and have no relationship to each other. Therefore, transactions that are not at an arm’s length are those where you’re dealing with related parties.
One thing that isn’t restricted is the ability of your SMSF to carry on a business. However, you cannot run a business that contravenes the requirement that a SMSF can only be operated to provide retirement benefits. As a simple example, this requirement would be breached if a SMSF fund member dipped into the fund to get cash to prop up his or her struggling business activities.
The benefits of using your SMSF for property development include:
If you hold the property until retirement and you go into the pension phase, you will pay no tax on either the capital gain if you sell or the rent if you continue to hold your investment.
Prior to retirement, the capital gains from selling your investment and any rent you earn from the investment is taxed at 15 per cent. There is an added bonus, from a capital gains point of view, if you have held the investment for more than 12 months, whereby the tax reduces further, down to as low as ten per cent for the capital gain.
The ability to borrow to invest in direct property enables you to access high-growth assets without the need to pay for them upfront (remembering that if you are looking to develop the property, you will need to do so with clear funds in the SMSF).
Investing in direct property in your SMSF gives you control of your investments and a real understanding of where your money is invested, as opposed to managed share schemes in traditional investment strategies.
The long-term benefits of holding property with significant growth in value will supplement other investments within the SMSF. If borrowed funds are used to acquire these properties initially, it provides you with the opportunity to hold and develop those properties once the borrowing is cleared. That will accelerate the value growth in your SMSF far greater than cash or other traditional investments.
If you would like to discuss property and your SMSF, please contact us and we’ll be more than happy to have a chat.
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Tony has 33 years’ experience as an accountant, and 13 years’ experience as a CPA. His first 18 years’ experience involved financial, management and operational accounting roles at a senior management level, in the security, transport, and forensic accounting industries
https://adpartners.com.au/wp-content/uploads/2017/08/logo.png00Tony Dimitriadishttps://adpartners.com.au/wp-content/uploads/2017/08/logo.pngTony Dimitriadis2018-05-02 20:39:282019-05-12 04:16:47Property development in your SMSF - Yes or No?
Established in 2001, AD Partners is a boutique public practice Accountancy and Business Consulting firm situated in heart of Carlton, Melbourne.
We service all areas of Melbourne, and offer personalised service to business owners no matter how big or small.