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Buying Property in a SMSF

Raj Rana • Mar 18, 2021

Buying an investment property with an SMSF

Buying an investment property through a self-managed superannuation fund (SMSF) can be a sound financial move. But all too often, it is placed into the 'too hard basket' due to the complex rules and restrictions surrounding superannuation.


It can seem like a minefield of regulatory bombs just waiting to explode. However, getting it right from the beginning can mean reaping the benefits for years to come.The Superannuation Industry (Supervision) Act 1993 specifies when and how an SMSF can borrow money to invest in property. 


A limited recourse borrowing arrangement (LRBA) involves the SMSF taking out a loan from a third-party lender for the investment property, which is then held in a separate trust called a 'bare trust'. The bare trust must be formed if finance is required and once the SMSF has identified the property it expects to invest in. While the SMSF is still the beneficiary, the bare trust will be the registered holder of the property until the loan is repaid. Only one property can be held under a bare trust at a time.


The LRBA can only be used for a single asset and ensures that, if the SMSF defaults on the loan, no other assets are touched. There are also minimum requirements surrounding the balance and contribution an SMSF must meet to purchase a property. 


If an SMSF uses a loan to purchase an investment property (i.e. it doesn't own the property outright) the types of renovations that can be made are restricted. Essentially, the property's 'inherent character' can't be changed, and only slight improvements and repairs can be made. For example, a rusted gutter can be repaired, but carpet can't be replaced with timber floorboards.


An existing residential investment property can't be transferred to a property held under an SMSF. A party involved with the SMSF, directly or indirectly, also can't live in the property. However, this works differently for commercial properties. All SMSFs can invest in commercial properties. Small business owners have the added benefit of being able to occupy the property if it's their business premises and pay market-rate rent directly to their SMSF.


Whether an SMSF invests in residential or commercial properties, tax benefits are available.


All tax deductions are available, however they can only be deductible to the fund. This means parties of the SMSF can't use the property's losses against their personal income. Deductions can only be used within the SMSF. While this doesn't necessarily result in a negative-gearing arrangement, it still means claiming deductions results in less tax to pay.  BMT has experienced an increase of tax depreciation schedules ordered for properties held in SMSFs. Both capital works and plant and equipment depreciation deductions can be claimed for property held in an SMSF. 


The SMSF operates in a 15 per cent tax environment, meaning it only needs to pay 15 per cent tax on rental income from the property. For this same reason, losses are less lucrative, as reduced liabilities are calculated at the same 15 per cent rate.


In the instance where the SMSF decides to sell the property after owning it for 12 months, capital gains tax (CGT) is discounted. The fund receives a one-third discount on any capital gain made from the sale, bringing the CGT liability down to 10 per cent. 


An SMSF in the retirement phase receives further tax concessions. When the investment property income is supporting this phase, it is tax exempt. The technical name for this is the 'exempt current pension income' (ECPI). The ECPI can be applied to the annual SMSF return once it begins paying one or more retirement phase income streams and meets the relevant requirements.  SMSFs can ensure they make the most out of their investment properties by claiming depreciation with BMT. Prior to investing in property with an SMSF, it's recommended to consult with Devonshire Accountants.


Article Credit - BMT Tax Depreciation is Australia's leading supplier of residential and commercial tax depreciation schedules. 


Contact us today on 07 3800 0807

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Top 4 things tenants want in a rental

By Raj Rana • 13 Dec, 2021
Whether you're thinking about purchasing your first investment property, adding to your portfolio or turning your home into an investment, you need to know what tenants want. 1. Location It's impossible to know what a specific tenant will want location-wise. But this is where it's important to identify your target tenant market and what they want in their location. For example,, families may be looking for school districts, while students will be looking for accommodation close to learning institutions or with transport routes. 2. Safety and security Everyone needs to feel safe in their own home. Tenants will want a property with secure locks and doors, lockable windows and window coverings for added privacy. Looking into the safety of an area could also be a good move when finding an investment property if you're unfamiliar with the area. Research crime statistics and history to get a gauge on the area and how this may impact potential tenant demand. 3. Move-in ready condition The last thing a tenant wants to do is submit maintenance and repair requests while they are in the process of moving house. Getting all the little things sorted before they move in is a must. Work through any items with your property manager and ensure everything is covered. The benefit of doing this early means a more comprehensive entry condition report, plus you get to claim any maintenance and repair request as an instant tax deduction in the same financial year. 4. Renovations and upgrades A modern and aesthetically appealing space doesn't just appeal to more tenants, it allows you to charge a higher rental rate to improve the cash flow of your investment. The roadblock to this is always going to be the costs involved. Renovations and upgrading a property isn't cheap. But claiming property depreciation as a tax deduction at take time can make a big difference to cash flow. Depreciation is the natural wear and tear of property and assets over time, and is the second highest tax deduction available to investors after loan interest repayments. When you renovate a property or upgrade an appliance like a dishwasher with a new one, you can claim depreciation on the improvement. Depreciation is claimed each financial year across an asset's or structure's depreciable lifetime. But just because something needs to be depreciated doesn't mean you have to wait years to claim back the full amount. Depreciation incentives like the 'immediate deductions' allows you to instantly claim some assets that cost less than $300. For example, if you purchased a new ceiling fan that costs $250 for your investment property, you could claim its full cost instantly in the same financial year. To learn more about how depreciation works for renovations, contact our office on 07 3800 0807 Article Credit in conjunction with BMT Tax Depreciation. BMT Tax Depreciation has been working in the property investment industry for over twenty years.

7 Things To Do Before Renting

By Raj Rana • 10 May, 2021
Are you thinking about moving to a new house but want to hold onto your current property? Turning it into an investment for the short or long-term can be a good option while increasing your cash flow. But before you do, here are seven things you need to do before renting out your home. 1. Speak to the team at Devonshire Accountants Speak to our expertise team that will guide you through the various deductions available and any negative gearing calculations in detail. Its an important step in planning the tax implications that you can have when preparing your tax return. Our team will also fully explain the deductions available and compliance that is required by you towards the Australian Taxation Office (ATO) 2. De-personalise the property While the property is still yours, it's important to make your future tenants feel like it's their own. Happy tenants will go the extra mile to look after it. This means removing the personal items in the property from when it was your home. Remove the kids' height measurements from the walls, the family dog's outdoor kennel and have all mail redirected. 3. Fix those 'maintenance request' risks early If it's broken, fix it. It mightn't seem like a big issue – maybe it's just a small crack in the wall or peeling paint – but putting it off is just creating a future problem for yourself. Making it a future problem may also make the small issue into a big one. For example, a tired-looking deck now could just need re-oiling but leaving it for later could result in a full (and costly) deck replacement. 4. Do smart improvements If you're thinking about making some slight improvements to your property before renting it out, keep improving your rental return and tenants in mind. Smart improvements will increase tenant interest and the amount of rent you can charge. For example, if your tenant market is young families, installing a bathtub can be a good choice. Easy-to-clean benchtops and flooring options are always a winner with tenants, too. An additional point to keep in mind is the timing of the improvement. If you make an improvement while you still live in the property, you won't be able to claim depreciation on any new plant and equipment assets. So it might be best to wait until you have moved out. 5. Clean Your future tenants need to leave the property in the state it was first leased in (allowing for fair wear and tear). Your property manager will complete a condition report to ensure this happens. To make sure you can keep your tenants accountable, it's important to also do your own part. Your property manager could also recommend a reputable cleaner to get the job done. 6. Update your insurance policy Your owner-occupier home and contents insurance won't cut it when the property is an investment. You need the appropriate landlord insurance policy. Landlord insurance will cover you for many insured events, including those unique to investment properties like tenant damage and loss of rent. Insurance policies differ between providers, so it's important to read the fine print when choosing the best-suited policy for you. 7. Get a depreciation estimate Too many people are missing out on claiming thousands in depreciation deductions. Depreciation is the natural wear and tear of a property and its assets over time. As a property investor to-be, you can claim this depreciation as a tax deduction each financial year once the property is available for rent. When you make your home an investment, contact a specialist quantity surveyor, such as BMT Tax Depreciation, to provide a free depreciation estimate. This could uncover thousands in deductions that you could claim. To learn more about depreciation estimates, please contact BMT Contact us today on 07 3800 0807 to discuss how we can assist you with your Investment property.
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