How Your SMSF Is Taxed When Buying Property

Tax concessions are one of the major reasons why SMSF trustees buying property with an SMSF tax.

Your SMSF tax rates vary depending upon whether your SMSF is in Accumulation Phase or Pension Phase. When your SMSF is Accumulation Phase you are still working, and you have not yet reached retirement age. Let’s crunch the numbers.

If a median-priced property of $667,000 is bought by a typical investor and sold a decade later for double the value, their capital gains tax can be $157,000. If it eventually doubles again in value, the tax bill climbs above $300,000. But if that property is held by an SMSF member in retirement, Australia’s superannuation rules cut the CGT to zero after age 60.

When your SMSF is in Accumulation Phase the following taxes apply:

1. Income Tax

15% is the tax rate for net income earned by SMSFs. The following are some common categories of income that attract a 15% tax liability in an SMSF:

• Employer Contributions
• Rent received
• Interest earned
• Dividends and distributions

2. Expenses

Just like your personal income tax returns, when you are calculating how much income tax your SMSF is liable for, you first work out your total income, subtract allowable deductions and then multiply the resulting amount by the relevant tax rate (i.e. 15%).

The following are some common deductions available to SMSFs owning direct property.

• Interest expense on mortgages
• Body corporate fees
• General repairs
• Insurance costs
• Accounting and Auditing fees
• Legal fees (except when they’re of a capital nature)
• Bank charges
• Depreciation
• Life and TPD (Total and Permanent Disability) insurance premiums and fees

3. Capital Gains Tax

Capital gains are also taxed at 15%, unless the asset has been held for more than 12 months, where the rate of tax drops to 10%. For example, if your SMSF purchased a property for $500,000 and sold it 13 months later for $600,000, the profit of $100,000 would be taxed at 10%, i.e. $10,000 tax payable (assuming no other capital expenses were available to lower the profit).

4. Stamp Duty

This tax cannot be avoided unless state governments change the rules in relation to this. It doesn’t matter if your SMSF is in Accumulation Phase or Pension Phase. Unfortunately, just because you are buying a property through your SMSF the Offices of State Revenue (OSR) around the country provide no relief for this tax. This is a state-based tax, as such the amount that will be payable upon purchase will be dependent upon what state the property is located in. Every state provides information on its websites about current rates of Stamp Duty.

5. Land Tax

Land Tax is also a state-based tax that is charged whether your SMSF is in the Accumulation or Pension Phase. Unless of course, you are buying the property in the Northern Territory – they do not have land tax in the Top End.

Land tax is charged on the value of the land associated with the property. Most states offer a threshold value that must be met prior to land tax being charged (for example in NSW the current land tax rate threshold is $822,000, land value above this amount attracts land tax at a rate of 1.6% p.a.).

In practice though, this tax is often not charged to SMSF tax for the following two reasons:

• SMSF Trustees often buy apartments as the rental yields are typically higher (making serviceability easier). The underlying land value for each apartment is usually quite low and therefore doesn’t usually exceed the land tax threshold.
• SMSFs are generally not grouped with other properties you already own in that state. For example, in the above example if you owned an investment property in your own name with $350,000 land value, and your SMSF owned another with an investment property with $250,000 land value, neither yourself nor your SMSF would be liable for land tax as they are not grouped together and individually each they fall under the $822,000 threshold.

In most situations, if you compare these taxes against buying property in any other entity that you may have, it is very likely that you will have to pay these taxes discussed above and potentially at a higher rate.

What happens to Taxes when your SMSF is in the Pension Phase

Once you convert your SMSF to the Pension Phase, all income and capital gains is taxed at 0%. This is a huge advantage that SMSFs have over all other types of holding vehicles. There are two main reasons why people use an SMSF to purchase investment properties:

• Properties that are earning rent. Once the SMSF is converted into Pension Phase, all rent received into the SMSF is tax-free. The SMSF then pays out a tax-free income to the member of the SMSF (assuming the member is over 60).
• Selling a property and not having to pay capital gains tax. This is a great trick to avoid CGT. Let’s say you purchased a property in your SMSF for $500,000 when you were 50 and you sold it 15 years later after you had retired at 65. Your SMSF sold the property for $1 million, realising a gain of $500,000.
• If you convert your SMSF to a pension phase prior to selling this asset, you will pay ZERO Capital Gains Tax. If you had of held this property in your own personal capacity, you would have to pay tax on $250,000 profit (after applying the CGT discount of 50%) at your marginal rate of tax. For most people, this would be a tax saving of around $90,000- $117,500 by holding the property in your SMSF!

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