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Property Investing and Self Managed Super Funds

By Domenic Belfiore

Josh Atherton, Director of Portfolio Property Investments has put together the five most important things to know when considering if using a Self Managed Super Fund to invest in property could work for you.

1) Can I Afford to use my Superannuation to buy property?

Years ago it was generally considered that an investor would need approximately $250,000 at least to set up a self managed super fund due to the costs around the set up and annual compliance management. To purchase property you generally needed to have enough funds to manage the entire purchase as gearing (borrowing), in your SMSF for property was not allowed. In 2007 when legislation changed and property investors were allowed to leverage their current superannuation balance and borrow to purchase a property within a SMSF structure. This essentially created one of the lowest tax environments that you could purchase property in.

Today, people with balances of around $100,000 could afford to invest in property with their super. Annual or regular super contributions will be required to allow you to service the debt in the SMSF coupled with the revenue earned from the asset itself. It is important to understand that Superannuation is a vehicle designed to provide stable income for a persons retirement, to do this, it is ideal that risk’s of investments be varied within a fund. Hence, putting all of your superannuation toward a single, geared property investment needs to be carefully considered along with the advice of a financial planner.

2) What’s the process if I want to use my Superannuation to buy a property?

Setting up a Self Managed Super Fund to buy property use to be an expensive and convoluted process. However, years of technological developments and the introduction of simpler processes have made it possible for most people to be able to afford setting up a Self Managed Super Fund. Costs can vary from $4000 to $10,000 with the average time taking 10 – 12 weeks depending on where current funds are located.

The first step is to see a qualified financial planner who understands the value and processes in investing in property. The financial planner will be able to discuss the pro’s and cons of investing in property with a Self Managed Super Fund.

Secondly, an experienced and qualified accountant will be used to set up the SMSF entity, trusts as well as arrange trust deeds tailored to be used for the limited recourse borrowing arrangement, which is the technical name for a SMSF loan.

Finding a suitable lender to provide the balance funds for the purchase is best done by a qualified mortgage broker who has experience in Self Managed Super Fund borrowing is the most recommended step, compared to going direct to your local bank as the people you deal with most likely wont have experience in this field.

You can then use your SMSF to continue to provide important things like your personal life and income insurances etc.

3) Can I buy any type of property in a SMSF?

This is where it gets a little bit tricky, seeking the right advice could save you a lot of money and potentially heartache in being severally penalised by the ATO should you purchase a property that is not compliant with SMSF lending guidelines.

Not all properties can be purchased when borrowing to purchase a property with a SMSF. For example, no significant improvement can be made to a property, which would essentially change the use of the property. This includes subdividing, large renovations, developments etc.

Identifying a property investment strategy must be one of the first steps you take when considering property and a SMSF. How long will you hold it for? What is your main objective with the property? Do you want to set and forget about the property?

You must also ensure that a SMSF transaction and asset is at all times considered by law as an arms length transaction.

Your financial planner will be able to discuss this with you and help you identify how you could best use your superannuation to invest in property.

4) How much tax do you save by investing with a SMSF V Outside an SMSF? 

As with any investment within your superannuation, you are still subject to income tax. A complying SMSF is taxed at 15% compared to being taxed against your marginal tax rate, often 30%- 45% on average.

You will also be required to pay capital gains tax when you sell the asset at the rate of your income tax level. In a compliant SMSF case this is 15%. However assets held for more than 12 months will receive a Capital Gains Tax (CGT) discount of 1/3rd, bringing the CGT to just 10% within your SMSF.

One of the greatest benefits of using a SMSF to invest in property is when you enter the pension phase, after 60 years of age; your income from your Superannuation is tax free. This includes capital gains and rent from a property.

5) What should I look out for when looking to use my superannuation to invest in property?

Conduct any simple Google search on buying property with your superannuation and you’ll find a myriad of people offering free advice, free setup costs and more. The first questions you need to ask when you contact anyone to help with your SMSF set up is:

  1. Are you a qualified financial planner with an Australian Financial Services Licence?
  2. Will you try, at any point to sell me a property which you will make commission from?

As more and more people use their superannuation to invest in property the market has become filled with property spruikers or sharks as we say! People who aren’t qualified to provide the right personalised advice however can pre-qualify you to use your super to invest. Their intention is to sell you a massively overpriced property with commissions of $30,0000 +.

By talking to a qualified team of experts who have your interest at the forefront is the safest way to use your superannuation to invest in property.

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