Negative Gearing with Self Managed Super Fund (SMSF) Property Investments
Negative geared property in a SMSF is rarely an effective tax strategy. However, using negative gearing as part of an investment strategy can be beneficial to build a portfolio whether residential or commercial property within the SMSF environment. In this article we will explore if negative gearing is achievable in an SMSF and how it compares to negative geared investment property held individually by property investors.
The overarching sole purpose test must align with any decision of a SMSF to buy an investment property. The sole purpose of a SMSF is to maintain the fund to provide retirement benefits to its SMSF members or dependants if the member dies before retirement.
What is Negative Gearing in a Self-Managed Super Fund (SMSF)?
Like any other taxpayer negative gearing is simply the tax-deductible expenses which exceed the rental income from a property investment. In other words a tax loss is incurred. The net loss is cashflow negative. The SMSF is required to source the cash required to pay excess expenses from other cash sources within the fund or by member or employer contributions subject to the contribution caps.
The taxable loss can absorb other taxable income within an SMSF which includes taxable contributions or can be carried forward if there is no other taxable income.
Buying a House (or Residential Property) which is Negatively Geared in Your Super Fund Vs being Held Individually
There are two significant differences in relation to negatively gearing a property using your SMSF or investing outside super in your own name being:
- availability of capital to buy an investment property versus the property loan
- tax savings
In a general overview, a negatively geared property tends to be more tax-efficient for an individual with a marginal tax rate of 45%. Conversely, when it comes to capital gains when you sell the property, ownership through a Self Managed Super Fund (SMSF) is usually more advantageous (see example below). It’s important to note that capital gains are not guaranteed, as they fluctuate based on market conditions at the time of sale.
In the example below the tax savings reduce the additional cash required of $22,416. A SMSF has to fund additional cash of $20,446 vs an individual who only has to fund an additional $16,507 after allowing for tax savings. However, on disposal the SMSF only pays capital gains of $12,000 vs $27,000 for an individual. If the property is sold when the SMSF is in full pension mode for the entire year the capital gain can be reduced to nil.
| SMSF | Individual |
| Tax deduction up to 15% | Tax deduction up to 45% (plus 2% Medicare) for y/e 30 June 2025 |
| Capital gains tax can be 0% to 15% on sale of the investment property (0% would apply if the fund was in 100% pension mode, the fund had sufficient carried forward capital losses or the property was a segregated pension asset) | Capital gains can be 0% to 45% (plus Medicare) on sale of the investment property (0% would apply if the individual had carried forward capital losses sufficient to absorb the capital gain) |
| Access SMSF cash to purchase the property | Generally, unable to use cash from SMSF unless you are 65 or over or aged 60 and have retired |
| Can rollover superannuation from other funds into SMSF to purchase the property | Generally, unable to utilise super from other super funds unless you are 65 or over or aged 60 and have retired |
| Contributions from personal sources or employer (subject to contribution caps) can be made to the fund to purchase the property | Can use personal cash sources to fund purchase |
| Borrowing can be used to purchase the property subject to the limited recourse borrowing arrangement (LRBA) rules usually with higher interest rates and the maximum loan to value ratio is generally about 80% | Less restrictive and flexible borrowing arrangements can be used with lower interest rates and generally can borrow a higher percentage of the purchase price depending on the valuation of the property. |
| Borrowing can be from a lending institution or from a member or other related party of the fund (subject to the ATO’s safe harbour guidelines). Generally, the major banks do not lend to a SMSFs but secondary lending institutions are accessible. | Can borrow from other related parties or a bank – access to major and secondary lending institutions. |
| Restrictions on who the tenant can be i.e.. a related party cannot lease a residential property from a SMSF unless it is used 100% in a business | No restriction as to who the tenant can be |
Example of negative geared commercial office
(for simplicity depreciation and cost of acquisition and sale have been ignored)
Purchase price of commercial office $880,000
Area 99m²
Place Newcastle NSW
Net Rent per month $3,542
(After rental expenses)
Annualised net rent $42,504
Maximum LVR 80%
Interest rate 7.95%
Borrowings $704,000
Sourced from existing cash $176,000
Mortgage P&I paid monthly $5,410
Interest paid in year 1 $55,635
Principal paid in year 1 $9,285
The property is negatively geared. The tax loss is $42,504-$55,635 = $13,131
Additional cashflow required is $42,504-($5,410×12)=($22,416) (includes the loan principal in year 1)
Estimated Annual Tax savings:
SMSF (in 100% accumulation phase) $13,131 x 15% = $1,969.65
Individual on the top marginal tax rate $13,131 x 45% =$5,908.95
of 45% (excludes Medicare)
Estimated Tax on disposal after holding the property for 12 months and no carried forward capital losses
Consideration $1,000,000
Capital gain (before discount) $ 120,000
Estimated Capital gains tax
SMSF (in 100% accumulation phase) $80,000 x 15% = $12,000
Individual on the top marginal tax rate $60,000 x 45% =$27,000
of 45% (excludes Medicare)
Access to Capital when Buying Property Through Your SMSF
The following are the major ways capital can be raised to purchase property through a SMSF.
- Borrowing
- Rollover super from other funds
- Contributions
- Existing cash or sell fund assets
If both members of a SMSF can access the bring forward rule it may be possible to contribute up to $720,000 (based on 2025 contribution caps) as member non-concessional contributions (contributions made from a member’s after taxed money). Subject to the contribution caps, employer contributions and member concessional contributions can be made to boost cash requirements. Depending on a member’s eligibility additional member or employer contributions can be made using the carry forward of unused concessional contributions rules to help fund the purchase of a property through an SMSF.
Please refer to our resource pages in relation to the above for further details.
Please seek advice from your Specialist SMSF Advisor or your Licensed Financial Advisor before implementing any of the above to ensure compliance with legal, tax and superannuation rules.
Taxation Considerations for SMSF Property Investment
Consider the following in relation to taxation when a SMSF invest in property:
- Income Tax – a SMSF is taxed at an income tax rate between 0-15% depending on the fund being in part or full pension mode.
- Capital gains tax – is taxed at 0-15%. On sale of the property capital gains can be absorbed by carried forward capital losses or if the property was held longer than 12 months a discount of 1/3 is available. If the SMSF is in full pension mode for all of the financial year or if the property is segregated to a pension account (an account-based pension in retirement phase) the capital gains on the property or a capital loss (a capital loss is not carried forward) is excluded. If the fund is in part pension mode a percentage of the capital gain will be excluded and any capital losses are carried forward.
- Travel Expenses -Since the 1 July 2017 no income tax deduction is allowed for travel, including motor vehicle expenses, airfares, public transport or meals and accommodation, to inspect or maintain a residential property (except if used 100% in a business) by a SMSF or an individual taxpayer.
- Depreciation Expense -Since the 1 July 2017 no income tax deduction is allowed for depreciation of used or second-hand assets in relation to residential properties (except if used 100% in a business) which were acquired on 9 May 2017 by a SMSF or an individual taxpayer. Second-hand assets acquired through a property purchase can be added to the cost base. Depreciation expense is still tax deductible in relation to capital works (the building structure).
- Negative gearing is not attractive when the fund is in pension mode as the tax advantage is lost. Investment expenses directly relating to a property are not tax deductible including interest on a loan when the fund is in full pension mode or the property is segregated to a pension account. The expenses may be partly tax deductible if the fund is in partial pension mode.
SMSF Borrowing to Purchase a Property
The following summarise the general rules in relation to a SMSF loans using a Limited Recourse Borrowing Arrangement (LRBA) to borrow money to purchase a rental property:
- The SMSF trustee establishes a separate trust generally known as a ‘bare trust’ which legally holds the property on behalf of the SMSF.
- The property must be an allowable asset which the fund is able to purchase under the superannuation laws and regulations.
- The SMSF borrows from a lending institution or alternatively can be from a related party such as a member of the fund, a relative or an associated company or trust.
- A related party borrowing should follow the ATO guidelines “safe harbour rules” or otherwise provide evidence of the terms and conditions matching what a lending institution would have provided. This can be difficult to provide acceptable audit evidence.
- The loan is limited to the property as recourse to the lender in the case the SMSF defaults on the loan.
- The property must be a single acquirable asset ie generally a property under one title.
- Ensure the fund’s trust deed allows it and it included in the investment strategy.
- The borrowing cannot be used to change the asset into a different asset ie building a house on vacant land.
- The borrowing cannot be used to renovate the property but cash from inside an SMSF can be used.
- The borrowing may be able to be used for maintenance provided the loan agreement allows for it.
Please refer to our resource page on SMSF borrowing for further details.
The Key Takeaways
- negative gearing is not a good tax saving strategy in a SMSF but may have other benefits
- a SMSF may use negative gearing to diversify assets of the SMSF
- access to SMSF funds to purchase direct property
- consider capital gains when making a decision to purchase a property in your own name or being owned by your SMSF
- consider borrowing within a SMSF vs borrowing individually
- seek advice about the pros and cons of negative gearing strategy in a SMSF
Do you need help with understanding SMSF Negative Gearing?
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