Investing in property is an extremely tax-effective way to diversify an SMSF, but caution has been urged.
A self-managed superannuation fund (SMSF) expert has weighed up the benefits and risks of using cash borrowed through the fund to buy direct property.
HLB Mann Judd Perth partner Peter Speechley said the rules introduced in September enabled SMSFs to diversify in an extremely tax-effective way.
"Super funds can now borrow money without the need to repay the outstanding loan, subject to certain conditions," Speechley said.
"Previously, funds were prohibited from borrowing, with only a few exceptions."
However, stringent rules must be met to allow SMSFs to borrow to invest in property, he warned.
As SMSFs are not allowed to take out ordinary home loans under the new rules, trustees should seek professional advice when structuring finance within superannuation, he said.
Speechley added that if the property is negatively geared, trustees must ensure the superannuation fund has adequate cash flow to meet interest payments.
"Borrowing to invest can magnify returns, but also magnify losses if the investment makes a negative return," he said.
Trustees cannot buy existing property for the funds from themselves or family members and cannot live in the property or use it for their own enjoyment, he added.
Some of the benefits of an SMSF buying property include gearing the investment within the fund, non-recourse loans, loans that have no impact on the ability to borrow outside of the fund and the fact that the property is kept in an asset-protected environment.
If the property is sold after retirement and a pension is being paid then no capital gains tax is payable, Speechley said.
There is a maximum of 15 per cent tax on rental income and the interest cost of the warrants is tax deductible.
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