A self-managed super fund, or SMSF, gives individuals complete control over the assets in their retirement funds, whether it shares, term deposits or residential property.

Likewise, more Australians are taking the DIY plunge, with the Australian Taxation Office (ATO) reporting that in June 2020, there were almost 587,000 SMSFs in Australia with over 1.1 million members.

The ATO estimated that the value of assets held by SMSFs was $728 billion, with around $40 billion held in Australian residential property. This holding is almost double the residential property assets held by DIY supe funds in September 2015.

This exponential growth makes plenty of sense as more Aussies recognise residential property is a valuable asset to include in an SMSF investment portfolio. That said, while using an SMSF to buy property is becoming increasingly popular, there are some rules to consider before diving into a purchase.

What is an SMSF?

An SMSF is a DIY superannuation fund that enables you to manage your super savings rather than a major industry fund or a retail fund attached to the banks.

An SMSF can have up to four members, all of whom must be a trustee. Simply put, each fund member is accountable for decisions made about the SMSF and the fund's compliance with relevant laws. For starters, all the trustees must follow an investment strategy that doesn't exceed their risk tolerance and meets their collective retirement needs. Moreover, trustees must keep their paperwork up to date as SMSFs are audited annually.

A sound investment strategy is in - holiday homes are out!

As part of their responsibilities, trustees must know the laws about investing in residential property through an SMSF. A holiday home used by the members, for example, isn't allowed, and it won't go down well with the ATO if you try this strategy. Also, you can't buy the children of a trustee a house through an SMSF.

Nor can an SMSF buy a property owned by a trustee or anyone related to the trustee, while the purchase must meet the 'sole purpose test' of exclusively providing retirement benefits to fund members.

The sole purpose test's objective is to ensure that the SMSF is only used to provide benefits to members upon their retirement or their dependents if a member checks out before retirement. The sole purpose test is the golden rule of SMSF property investment and is reviewed by the annual audit.

Tax breaks attract property investors to DIY super

There are significant advantages to owning a residential property through an SMSF. First, your SMSF is taxed at 15%. This rate of tax is usually considerably lower than most people's personal tax rates. Second, there will be capital gains tax discounts when you sell. For example, if the trustees sell the property before retirement age, the capital gains tax (CGT) is calculated at a discounted rate. If it sells when the trustees retire, there is no CGT on the sale.

While the tax breaks encourage more Australians to buy an investment property through super, the fundamentals of real estate investing such as location, location, build quality, and rental returns still apply.

If you don't have an SMSF, your accountant can help you get started, while an experienced real estate agent from Raine & Horne can help you find a suitable investment property.