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Making money out of property in an SMSF

During the week I sorted out my reservations about investing in property inside an SMSF during an interview I had with one of Australia’s top SMSF lawyers.

Dan Butler from DBA Lawyers was a guest on my SWITZER program on the Sky Business Channel.

This video is on up on our website, and if you are thinking about using your super fund to buy property, I would recommend you look at it closely (click here to watch it on Super TV [1]).

One of the reasons I’ve been a bit toey about property in super has been the Australian Tax Office’s recent draft tax ruling, which has brought conflicting interpretations from super experts.

In a nutshell, the ruling – which lawyers tell me you can’t rely on 100% because it’s only a draft ruling – has suggested you could change a property you have bought using borrowed money inside your SMSF.

Before the ruling, it was basically impossible to buy a beaten up property using borrowed funds and then renovate or restore the thing. This was crazy because it stopped you from pocketing capital gains and higher rents and also stopped you from maximising the returns in your super fund.

Note: you could always have bought a property using your own existing SMSF money and you could have knocked the thing down and turned it into a block of apartments – the issue is that you couldn’t use your SMSF to borrow, or gear (known officially as a limited recourse borrowing arrangement), to buy a property and then also use borrowed funds to renovate it.

Now, after talking to Dan, I believe if you use your SMSF to borrow money to buy the property, you then can use your existing SMSF money to renovate or restore your property. This means you could add rooms and even a pool – but remember, you can’t make these changes using borrowed funds.

I believe this is real progress and a fair interpretation by the ATO because it means those who don’t just want to be in shares can give themselves exposure to direct property. But more importantly, it helps SMSF trustees to enhance the value of the asset and the potential income flow, which is the trustee’s obligation. They are supposed to make investment decisions that help their retirement goals.

One other little observation about property in SMSFs, which some people might not have thought of, is this: you could buy a property, renovate it, rent it out, keep it until you are retired, and then withdraw it as a lump sum and live in it.

There would be stamp duty, of course, but no capital gains tax!

Property inside an SMSF is starting to look better and better. However, until the government legislates the changes, there’ll continue to be some debate about what you can and can’t do. In the meantime, if you plan to borrow to buy property for your SMSF with the intention of renovating, run you’re plans by a lawyer.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in the Switzer Super Report