You may have heard that people are using their superannuation to purchase investment properties. This is something that savvy investors have been doing for some time but the practice exploded in 2007 when SMSFs were allowed to be used to buy assets.
Buying property with a SMSF isn’t so straightforward however and carries some risks. Managing your own superannuation takes time, dedication and some money but can offer good tax benefits and allows you to have more control over your super. Here are some things you should consider.
Using all your super to buy one or two properties is a risky approach. Instead, you’ll want a large enough super balance to allow you to diversify your portfolio across other types of investments. You can use both your super and that of other fund members, such as your spouse or another family member to achieve a higher balance for investing.
You need a minimum of $200,000 in super savings for an SMSF investment strategy to be a cost-effective option, according to research by the University of Adelaide’s International Centre for Financial Services. Ideally, you would use some of your super to buy property and allocate a percentage to other investments, such as shares or term deposits.
The Benefits of SMSF Property Investment
When you buy a property through a SMSF, the fund will pay a maximum of 15 per cent in tax on rent it receives from the property. On properties held for more than a year, the fund receives a 33 per cent discount on capital gains after it is sold, bringing your capital gains tax liability down to a maximum of 10 per cent.
You can also make repayments from pre-tax dollars by salary sacrificing additional income to super to pay off a loan quicker from pre-tax dollars. So paying 15 per cent on salary sacrifice and then making additional repayments instead of paying your marginal tax rate on the income and saving it outside your super.
While there are rules that prevent you from purchasing a residential property from yourself or a related party, you can purchase a commercial property to lease back to your own business as long as you pay the current market rate for rent. This helps free up funds to grow the business.
Aside from the requirement of a big balance to diversify your investments, there are other downsides. It can cost thousands to set up a SMSF along with adviser fees, accountant fees and other ongoing costs such as appointing an approved SMSF auditor to annually audit your fund.
If you’re negatively geared, the tax offset only applies to other income earned within the fund taxed at only 15 per cent rather than at your marginal tax rate on your regular income. You also cannot personally benefit from the property. Investments within a SMSF must be maintained on a strict commercial basis and be purchased on an ‘arm’s length’ basis. You cannot purchase from, lease to, or rent to a related party. You also cannot use a SMSF property as a holiday house or rent it out to a family member.
Ensure you’re certain about your cash flow in the future. While you can borrow to buy property with a SMSF, you cannot borrow to improve the property. Ensure that your level of contributions, plus the rental income, will be enough to cover any additional cost you might incur.
There are very strict auditing and reporting requirements for a SMSF and the ATO can impose harsh penalties for those who do not comply, so it is vital you get appropriate legal advice. Whether you buy a property using a SMSF or through other means, you’ll require conveyancing services.
If you need assistance with property conveyancing in Melbourne or property law advice in Victoria, talk to the experienced team at Just Conveyancing. Contact us online or call us on (03) 8580 2276 today.