Super and Property – More Successful Than Ever
Monday, January 5 2009
The latest statistics from the Australian Tax Office (ATO) show that the landscape of superannuation is changing. More and more people are opting for a Self Managed Superannuation Fund (SMSF) to take control of their investments and enjoy the flexibility they provide.
With this flexibility they can now directly invest in real estate and get set in the latest property hot spots, for example in pockets of Brisbane, Cairns or Sydney.
Why are SMSFs so interesting?
Not only do you get choice but SMSFs can have up to 4 members which make them ideal for families. Your SMSF now becomes a powerful source of cashflow with up to 4 members contributing at least 9% of all of their salaries into the fund every year. – Imagine the possibilities.
On top of that, we remember that the income on super funds is only taxed at 15% and there is the potential for no capital gains tax in retirement. This makes a SMSF structure the ideal place for a property investment.
When can you start?
One rule of thumb often quoted by the ATO is that a SMSF should have at least about $200,000 in assets to get started. This is to reduce the impact of initial and ongoing costs of a SMSF in comparison to other superannuation vehicles.
Our own research shows that a good quality property investment in a SMSF with strong cashflow can already be achieved with a minimum starting capital of around $120,000. You can also use a SMSF loan to finance the balance of the property purchase price.
You can roll over your existing superannuation into a SMSF or put in voluntary cash from other assets you may own. Certain rules must be followed but this is absolutely your choice and with most funds you shouldn’t have a problem doing so. Knowing that you can combine your own super with up to 3 other people you might have the minimum starting capital already now.
Benefits of Property Investing through Super
A SMSF gets practically the same benefits from a property investment like a personal investor. There are tax deductions from depreciation schedules and negative gearing benefits too.
Then there is a tenant who pays rent and the super contributions from your employers. If for example you bought a 1 bedroom unit for $360,000 in Sydney your SMSF may collect rent of about $400 pw or $20,800 per year. Add to this at least 9% of your salary that your employer pays to your SMSF, which is another $5,400 if you’re on an income of $60,000. Should you have 4 members in the fund you may get up to $21,600 of extra cash inflow from employer contributions assuming they all have the same salary.
Another highlight is the ability to fast pay loan repayments. The strong cash inflow position (like established above) and tax deductions as well as already low interest rates on borrowings thanks to our current market environment gives the SMSF the opportunity to pay down a SMSF loan much faster than otherwise possible. Once fully paid down you may still be another 10-20 years away from retirement and you can do the next property.
In a nutshell, a property investment in your own SMSF gives you these amazing benefits:
- Bricks & Mortar investment unrelated to market volatility of global stock markets
- Easier to get finance from a bank than in personal name
- Strong cash flow position from rent and contributions
- Long term growth in preparation for retirement
- Leveraged investment asset for increased returns
- Tax-effective benefits from property deductions and negative gearing
- Low tax on income: 15% - No tax on sale: 0% on capital gains in retirement
Property investing in super is one of the best ways to create wealth for your future. Australians know property and love property. Now they can do it in super too. Results from our investment analysis suggest that if you invest in property in super vs. outside of super you’re able to increase returns by up to 35%.
Which Property can a SMSF buy?
A SMSF can buy property such as offices, factories, shops, houses and units which are income producing and not used for your own personal benefit. A SMSF may, however, own business real property from where you run your own business.
How is it done?
SMSF trustees have to observe certain rules that are imposed on them to make sure they are not running the risk of the SMSF becoming non-compliant which would result in big penalties. Also, in principle a SMSF is no allowed to borrow. If there is a SMSF loan used to finance the purchase of a property this must be structured using an instalment warrant. See our downloadable eReport called “How To Boost Your Super Using Breakthrough Property Warrants” for a detailed explanation of a compliant structure.
Several rules and conditions apply and you should seek professional advice before using the discussed strategy. Should you consider a property investment through super we are happy to explain these requirements to you and provide you with a personalised strategy. Please contact our office for further assistance.
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