SMSF and Property
A new battalion – property and superannuation join forces?
Since time immemorial it has been argued as to whether the benefits of gearing property investments outweighed the tax concessional environment offered by superannuation. Now the battlefield has changed dramatically. Why would you choose one over the other when you can have the best of both worlds. New laws introduced in September 2007 allow Self Managed Superannuation Funds (SMSF’s) to, for the first time, buy geared property in a simple and uncomplicated manner. SMSF’s can now select a property of their choice, be it residential or commercial, and borrow up to 80% of the value of the property. The most common investment strategy seen in the baby boomer era was to invest all surplus funds into accessible investments including property and shares and then cashing these in and contributing the funds into super just prior to retirement. The only disadvantage of this strategy was a potentially very large Capital Gains Tax bill.
However, this strategy has been dramatically hampered by the Governments new contribution rules which only allow $25,000 of concessional contributions per year.
The effect of the new contributions rule is to significantly disadvantage generation X and Y. It is fair to say that most young singles and young families have better things to do with their money and more pressing needs than to make the most of their $25,000 per year contribution limit. Then when they are getting closer to retirement and have more surplus funds they will be prevented from, like their pre-decessors, making large contributions just prior to retirement.
Why would you buy property in a SMSF instead of personally?
For many reasons including;
- you get the benefit of ‘leverage’,
- a maximum of 15% tax on any rental income in excess of costs,
- you receive a tax deduction for the loan repayments of principal (which is normally impossible) via salary sacrificing the amount required to cover the shortfall,
- asset protection – the asset is protected from creditors in the event of a lawsuit or bankruptcy (some conditions apply),
- the property can still be sold and the loan repaid at any stage,
- any capital gains on the property when sold will be taxed at a maximum rate of 10% (if asset held for more than 12 months)
- But the biggest incentive of all – if you keep the properties until age 60 and commence a pension from the fund,
- any capital gain on the property will be TAX FREE,
- any rent on the property will be TAX FREE,
- any income paid out to you will also be TAX FREE.
The laws are only new and law complying products are now being introduced and marketed. It is envisaged that these products will hit the market like a storm once investors realize the potential. SMSF’s are now the largest segment of the superannuation industry and it is likely that this figure will increase exponentially once knowledge of the loan products becomes widespread. It is also interesting to note that this may be the first time in history that all advisors (financial planners, accountants, auditors, property advisors and mortgage brokers) have a common ground for advising clients. All advisors have something to gain by assisting clients into these products. It’s not only a busy time ahead for advisors but a time to join forces and put a cease fire on the battle.
The team at Wholistic Financial Solutions can assist all trustee of SMSF’s consider this option in regards to borrowing to buy property within their super fund. Come along to our free information seminar or request a free consultation to discuss your personal situation. Call Catherine on 02 6162 4546