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The secrets to profiting from property investment in SMSFs

Investing in property within a self-managed super fund offers the potential for substantial tax savings, but it's not for those lacking property market experience. Sophisticated investors should consider several key factors, including costs and compliance, to ensure success within their SMSFs.
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More than a decade ago, a client in his 60s purchased a commercial property for $1 million, and he recently sold it for $7 million – all within his self-managed superannuation fund (SMSF). And instead of facing a hefty capital gains tax (CGT) rate of 47 per cent, he paid only up to 10 per cent in SMSF, saving more than $1 million in taxes.

One of the most significant advantages of SMSF property investment is the potential for substantial tax savings, and the client’s story is a prime example of this. Investing in property within an SMSF offers a tax-efficient way to grow wealth.

But while it’s possible to achieve massive tax savings and profits through SMSF property investments, investors can also face losses, especially if they’re not careful and don’t do their research.

  • Managing costs, compliance and other key considerations

    Below are several important factors to keep in mind that could mean the difference between success and failure in property investing within an SMSF.

    1. Understanding costs: It’s important to remember that property investment within an SMSF involves higher entry costs compared with traditional investment avenues, such as managed funds in superannuation. Management expenses – including accountant, auditor and financial adviser fees – can add up. And interest rates on SMSF property loans are typically higher than for other property loans.
    2. Tax implications: SMSF pensions enjoy tax-free concessions up to a balance of $1.9 million for members aged 60 and over, and CGT rates within super are typically below individual investors’ average marginal tax rates. In an SMSF, tax is paid only when profits are realised: if there’s no profit, there’s no tax payable. However, a key distinction from personal investments is that SMSF losses incurred from property cannot be offset against taxable income outside the fund.
    3. Regulatory compliance: SMSF trustees must adhere to strict regulations, which can limit the flexibility of property investment decisions and rental arrangements.
    4. Investor expertise: The key differentiator in SMSF property investment often comes down to the investor’s level of sophistication in the property market.

    In addition to the fees above, there are other ongoing costs to consider in property investment, including rates, insurance, body corporate fees, land tax, property management fees (if an agent is used), and expenses related to repairs and maintenance.

    An SMSF investor looking to surpass the returns achieved within larger superannuation funds therefore needs to calculate the return needed to offset these costs and still yield a superior outcome. For reference, average returns for default super options like balanced portfolios have hovered between 7 and 8 per cent over the past decade.

    Achieving returns after costs that outperform those delivered by professional fund managers can be challenging, especially considering the power of compounding over time. The client mentioned earlier is a prime example of a sophisticated investor with years of property market experience; his success in the SMSF property investment can be attributed to this expertise.

    Diversification and risk remain essential

    In Australia, people buy, on average, one or two properties throughout their lifetime. Concentrating retirement assets into one or two properties within an SMSF can be a high-risk strategy, particularly for those without experience in the property market.

    Diversification plays a crucial role in risk mitigation, and depending excessively on property investments can lead to unfavourable retirement outcomes. Superannuation primarily serves as a vehicle for securing one’s retirement future, so the need for a well-balanced and diversified investment approach within an SMSF is paramount.

    Investing in property within an SMSF is a complex strategy, especially when it involves borrowings. Potential investors should perform a self-assessment to evaluate the strategy’s costs, their own expertise and their ability to make informed decisions in a dynamic property market.

    And while establishing an SMSF for property market investments can yield significant benefits, investors should always proceed with caution and a clear understanding of the associated risks and opportunities.


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