Some investors desire a self-managed super fund (SMSF) due to their diverse investment options. Have you ever thought, “An investment property could suit my investment goals. But I don’t know what’s involved.”? The Sunshine Coast offers opportunities for property investment. Consider this:
The region’s property market grew by 7.8% in 2024.
A Propertyology market outlook predicts the Sunshine Coast property market will grow by a further 12 to 16% in 2025.
We’d be remiss not to mention that opportunities come with risks. Jumping into a market you don’t fully understand generally doesn’t end well. If you’re looking to purchase property with your SMSF, here’s what you need to know.
Key takeaways
- SMSF properties may receive capital gains tax concessions.
- Property expenses may be tax-deductible with proper compliance.
- The Sunshine Coast has property investment opportunities.
- Property investment can provide diversification.
- Investment property must meet the sole purpose test.
- All transactions must occur at arm's length.
- In-house assets must not exceed 5% of the SMSF's total value.
- There are various penalties for non-compliance.
- LRBAs enable SMSFs to buy property they otherwise wouldn't have been able to afford.
- Understand the risks associated with investment properties.
Why use your SMSF to buy a Sunshine Coast investment property?
Tax benefits
When you hold property in your SMSF rather than your personal name, the tax treatment changes significantly. Compliant SMSFs in the accumulation phase may pay tax on rental income at 15% rather than your marginal rate. Funds in pension phase may pay even less. The key word here is ‘compliant’, these concessions only apply when you’re meeting all superannuation law requirements.
Various property expenses may be tax-deductible. The property must meet compliance requirements and be genuinely available for rent. Deductions may include:
Maintenance costs.
Property management fees.
Council rates and land tax.
Lenders Mortgage Insurance.
Advertising for tenants.
The deductibility of expenses depends on your fund’s specific circumstances and compliance with ATO requirements. Consult a registered tax agent for which expenses apply to your situation.
The capital gains tax (CGT) treatment of SMSF property sales depends on multiple factors, including:
How long the fund’s owned the property.
Whether the fund is in the accumulation or pension phase.
Compliance with all superannuation and taxation laws.
Compliant SMSFs may be eligible for CGT concessions that differ significantly from the tax treatment of property held personally. The specific outcome for your fund will depend on your individual circumstances. Seek advice from a registered tax agent before selling any SMSF property to understand your potential tax obligations.
Regional opportunities
Beyond the tax treatment, location matters. The Sunshine Coast offers specific advantages that make it worth considering for SMSF property investment. If you’ve ever been to the Sunshine Coast, you can understand the appeal. A laidback coastal lifestyle with great shopping places is a dream to many. There’s potential for long-term capital growth. But returns are never guaranteed. According to Real Estate Investar, the median rental yield is 3.26% for houses and 3.96% for units. There’s a low vacancy rate of 0.71%.
Business benefits
Under specific conditions, a commercial property purchased through an SMSF may be rented to a fund member or a related party if it meets the ATO’s definition of ‘real business property’. This arrangement has strict compliance requirements, including:
The property must be used wholly and exclusively for business purposes.
Rent must be set at market rates.
The rental income from a compliant business premises may grow the fund. Professional advice is crucial for these arrangements. Consider approaching:
A financial adviser.
A tax agent.
A solicitor.
That may seem like a lot of advice. But these are complex issues. Non-compliance can result in significant penalties.
Diversification
Under superannuation law, the Australian Taxation Office (ATO) expects an SMSF to have a diversified investment strategy. A residential or commercial premise is one way to achieve diversification. Professional advice is crucial to ensure it’s the right decision for your circumstances.
Essential SMSF Property Investment Rules You Must Know
Sole purpose test
One of the most fundamental of SMSFs is the sole purpose test. This test requires that all investment decisions be made with the sole goal of providing retirement benefits to fund members. This has significant implications for property investment:
Residential property held in an SMSF cannot be rented to, or lived in by, fund members or their relatives. This breaches the sole purpose test.
You cannot transfer a residential property you currently own into your SMSF. The fund must acquire property at market value from unrelated parties.
Commercial property may be rented to fund members or related parties only if it meets the strict definition of ‘business real property’ and all compliance requirements are satisfied.
All arrangements must be properly documented and maintained at arm’s length.
The ATO is strict about the sole purpose test. Breaches can result in significant penalties, including the fund being declared non-compliant. Seek professional advice before any SMSF property transaction.
Arm's length rule
All transactions must be completed at arm’s length. This means that the transactions must reflect market value and be conducted as if the parties were unrelated. The ATO actively monitors SMSF transactions for non-arm’s length dealings.
Examples of arrangements the ATO may consider non-arm’s-length include:
Renting a business premises at above or below the prevailing market rate.
Overpaying or underpaying a relative working for your business.
Purchasing property from related parties at non-market prices.
Providing interest-free or below-market-rate loans.
Non-arm’s length income (NALI) provisions can result in income being taxed at the top marginal rate (currently 47%) rather than the concessional SMSF rate. To say this could impact your retirement savings is an understatement. Independent valuations and professional advice may ensure all transactions meet arm’s-length requirements.
In-house asset restrictions
In-house assets are investments in, or loans to, related parties of the fund. The ATO strictly limits in-house assets to no more than 5% of the SMSF’s SMSF’s total market value.
Residential property held in an SMSF cannot be rented to fund members or their relatives. This is prohibited under the sole purpose test, not merely restricted as an in-house asset.
Commercial property that meets the ATO’s definition of ‘business real property’ is exempt from the in-house asset rules. This means it can be rented to related parties and doesn’t count toward the 5% limit, provided:
The property is used wholly and exclusively for carrying on a business.
The rent is set at market rates.
All transactions are properly documented.
The arrangement is maintained at arm’s length.
The definition of ‘business real property’ is technical and strictly interpreted by the ATO. What if a property includes a residential component? For example, a caretaker might live on the property. Additional rules will apply. Properties larger than 2 hectares also have specific requirements.
Non-compliance with in-house asset rules can result in penalties and the fund being declared non-compliant. Seek advice from a financial adviser and solicitor when purchasing commercial property through your SMSF or entering rental arrangements with related parties.
Consequences for non-compliance
Significant trustee fines (up to $13,320 per contravention).
Disqualification from acting as a trustee.
The fund being declared non-compliant, resulting in the loss of all tax concessions and taxation at the top marginal rate (currently 47%).
Director penalties for unpaid superannuation guarantee charges.
SMSF assets being frozen.
Criminal prosecution in serious cases.
The financial impact of non-compliance can be devastating to your retirement savings. Professional advice and ongoing compliance monitoring are essential for all SMSF trustees.
Limited recourse borrowing arrangement (LRBA)
An LRBA is a way for an SMSF to borrow money to purchase an asset. A borrowing arrangement may increase an investor’s access to the real estate market. An SMSF property loan also exposes investors to extensive administrative work and restrictive lending criteria.
The borrowed money may pay for loan costs and stamp duty. Borrowed funds can pay for repairs and maintenance. Basically, work that’s designed to preserve the property’s condition. It can’t be used for capital improvements or renovations that significantly enhance its value. What distinguishes a repair from an improvement? That’s not always clear. It’s best to seek advice from a registered tax agent.
SMSF borrowing is complex and carries significant risks that differ from standard home loans:
SMSF loans typically have higher interest rates and fees.
Stricter lending criteria and lower loan-to-value ratios (typically maximum 70-80%).
The property must be held in a separate bare trust with specific documentation.
Limited ability to make improvements or renovations while the loan is active.
Potential cash flow pressure on the fund to meet loan repayments.
If the fund defaults, the lender can only claim the specific property, not other SMSF assets.
Complex legal and compliance requirements.
The ATO has specific requirements for LRBAs. Non-compliance can result in the arrangement being unwound and significant penalties. Professional legal, financial, and tax advice is essential for any SMSF borrowing arrangement.
Related parties and in-house asset rules
You may borrow from a related party to fund an SMSF property purchase. However, you must be able to demonstrate that the arrangement is a genuine commercial borrowing, not a contribution or financial assistance. Requirements include:
A formal written loan agreement.
Interest rates comparable to commercial rates for similar loans.
Regular loan repayments.
Proper security documentation.
The arrangement must be maintained at arm’s length.
If the ATO thinks the loan is not genuine or not at arm’s length, it may be treated as a contribution (potentially resulting in excess contribution penalties) or trigger non-arm’s-length income provisions. Obtain professional advice from a financial adviser and solicitor before borrowing from related parties.
Property investment risks
While investment properties can provide many potential benefits, it’s important to recognise the risks to your SMSF.
- Liquidity. Property is an illiquid investment. There are consequences when you put a big part of your SMSF in an asset that isn’t easy to convert to cash. What happens when you need to meet member benefit payments and minimum pension requirements? What if you find market opportunities, but you don’t have enough freed-up money? SMSFs have obligations to meet.
- Capital loss. Don’t think property values can’t fall. They absolutely can. There’s no guarantee that a property will increase in value over time. Imagine the property market enters an extended downturn. How would a capital loss hurt your retirement savings?
- Complexity. You may have gotten the impression that SMSFs are highly regulated. You don’t know the half of it. The ATO and ASIC are strict enough. But then there’s state-based property laws. If you’re not compliant, you could get hammered by penalties. Professional advice and ongoing compliance monitoring are essential.
- Concentration risk. Property is one of the most expensive types of investments. Unless you have a massive SMSF, it’s probably going to represent a large part of your fund’s total assets. This concentrates risk. You may have thought it was a safe choice, but then the property underperforms. Perhaps the rental market dries up. In these situations, this big asset creates big problems for your fund’s performance. The ATO doesn’t insist on diversification for no reason.
- Vacancy and tenant risk. If your investment property is sitting empty, expenses don’t just disappear. Consider how an extended period without rental income would affect your SMSF. Tenants can also be a pain. Damage to your property or unpaid rent are potential problems.
- Borrowing risk. Repayments on an LRBA are expected regardless of rental income or property performance. If interest rates increase, your cash flow can suffer.
- Regulatory change. Superannuation and taxation laws change regularly. Any beneficial tax treatment your SMSF property investment gets now may not last forever.
- Exit strategy. Selling SMSF property can be complex, particularly if the fund is in pension phase or members need to exit the fund. Consider your exit strategy before purchasing.
From our clients
The FAA team helped us with setting up a SMSF and Property Purchase under their Excelsior Program. The team is a one stop shop for as much or little as you want to help with your Financial Planning, and have always conducted themselves in a very respectful, professional and impartial manner. Always contactable, easy to reach and very efficient in their communications.
FAA have managed my property for the last five years. Very professional staff and service. Great communication between office and client always happy to assist. Easy recommendation to anyone looking for a reliable team.
Your team is such a credit to you and I can't thank FAA property enough for your support and professionalism during our time renting with you.
Disclaimer: This feedback is the opinion of this client only. It may not reflect the experiences of every client.
Conclusion
Property investment may provide retirement benefits to a self-managed superannuation fund. That’s why some people do it. Will it work for you? That’s a tricky question. There are many strict rules governing SMSF investments. Understand the opportunities and risks involved depends on an in-depth understanding of the rules and the myriad risks involved. As a trustee, you need to know what you’re getting into and the funding options.
Are you looking to purchase property with your SMSF?
Contact us for an introductory discussion about SMSF property and general information on the process. The consultation will not contain any personal advice.
