An SMSF is not a typical property investor. It cannot easily top up cash for a surprise renovation, it has strict rules about what money can be spent on, and every dollar of cash flow counts toward a member's retirement. Those constraints are exactly why brand-new property tends to suit a fund better than an older home, especially now that new residential purchases inside super generally have to be funded without an LRBA.
This is general information only. It is not personal financial or tax advice.
1. The full depreciation schedule
Depreciation comes in two layers. Capital works deductions cover the building structure, generally at 2.5 per cent a year for residential buildings. Plant and equipment deductions cover items like ovens, air conditioning, carpets and blinds.
Since 1 July 2017, investors who buy second-hand residential property generally cannot claim depreciation on previously used plant and equipment, and that restriction applies to SMSFs. When the fund is the first owner of a new property, it can claim both layers from day one.
A quantity surveyor's depreciation schedule sets out the figures. Inside super, each dollar of deduction reduces income taxed at 15 per cent in accumulation phase. That is a smaller saving per dollar than at personal marginal rates, but it still keeps more rent working inside the fund.
2. Less maintenance, fewer compliance headaches
SMSF trustees have to separate repairs from improvements carefully. Under an LRBA, borrowed money could never be used for improvements, and even with cash, any major work has to fit the fund's investment strategy and the sole purpose test.
A new property typically needs very little work in its early years. That preserves the fund's liquidity for pensions, expenses and vacancy periods, and reduces the number of repair-versus-improvement judgement calls a trustee has to make.
3. Builder warranties
Every state has statutory warranties covering defective building work. In New South Wales, for example, major defects are covered for six years and other defects for two years, and home warranty insurance applies to most residential building work above a set value. The details vary by state, so check what applies where you buy.
For a fund that cannot simply absorb a large unexpected repair bill, that protection matters.
4. Tenant appeal
New homes offer modern layouts, current appliances and better energy efficiency. Most states now build to a 7-star energy rating standard under the National Construction Code, which generally means lower running costs for tenants. That can support rental demand, though no rent or occupancy level is ever guaranteed.
5. More flexibility with cash
The LRBA rules required a single acquirable asset, which made separate land and construction contracts difficult. A fund paying cash is not bound by those LRBA-specific rules, so house-and-land and off-the-plan purchases can be considered, provided the fund's deed and investment strategy allow it and the fund has the cash to complete.
A worked example
Consider an SMSF in accumulation phase that buys a new townhouse for $600,000 cash. It rents for $580 a week, or $30,160 a year. Rates, insurance, management and other costs come to $8,000, leaving $22,160.
Without depreciation, tax at 15 per cent is $3,324. If the first-year depreciation schedule shows $12,000 in deductions, taxable income falls to $10,160 and tax falls to $1,524. The fund keeps an extra $1,800 that year.
These numbers are arithmetic for illustration only. They are not a forecast of rent, costs or deductions for any property.
The trade-offs
New builds come with their own risks:
- Price premium. New property can cost more than comparable established stock, and some of that premium may not hold.
- Valuation risk. The value at completion can be lower than the contract price, particularly off the plan.
- Supply risk. Areas with a large pipeline of similar apartments can see softer rents and resale values.
- Construction and developer risk. Timelines slip and builders fail. Sunset clauses and deposit protection matter.
- Settlement risk. If the fund is buying with cash, it must be certain it can settle when the property completes.
What to do next
- Ask your SMSF accountant to confirm the fund can complete a cash purchase, what buffer it should keep, and whether the investment strategy needs updating.
- Get a depreciation estimate from a quantity surveyor before you commit, so the numbers are real, not assumed.
- Look at the property and the location independently. EWC sources new properties for SMSF buyers and coordinates the property side. Book a free call or visit the services page.
General information only, not personal financial advice. Speak with a licensed adviser before acting.