We know that Superannuation involves long-term savings to provide us with income in our retirement, and that most super funds are managed by fund managers and other industry professionals. A Self-Managed Super Fund (SMSF) is similar, but the fund is managed by its own members for their own benefit.
In 2007 the Australian Government made it possible for Australians to borrow money to buy property using their SMSF, including houses, units, commercial property and vacant land. Buying property through super can be a great way to invest for retirement, and there are some significant advantages in doing so, but you also need to be aware of the risks and potential pitfalls involved. It’s a major financial decision and you need to have the time and skills to do it.
Are you looking to control your Super Fund Investments? Do you have an existing Super Fund with enough money in it to borrow and buy property? Here are some of the advantages and disadvantages of buying property with Super.
Buying property through super is a great way to invest for retirement and arguably more relevant to people who are only 20 to 25 years away from it. Not only are they more likely to have more super money at their disposal, there is a higher chance they will be able to hold the property until after retirement to realise the significant tax savings.
This strategy isn’t for everyone though, and you should think carefully before deciding to set up your own SMSF. Start by getting some professional advice, talk to your accountant, your mortgage broker, or your financial planner to find out more about Self Managed Super Funds
SMSF can borrow for property – Benefits
Self-managed superannuation funds (“SMSFs”) can now borrow money to help purchase properties. This allows you to build long-term personal wealth by building a diversified portfolio of investments whilst benefiting from available tax concessions. Superannuation laws are complex and the consequences of non-compliance can be serious, we recommend that you obtain your own independent advice.
Historically, well located properties double in value every eight to ten years*. In addition, there may be several advantages to using a SMSF to acquire an investment property, including a number of tax benefits.
For example, SMSFs may be eligible for a concessional tax rate of 15% on rental income earned from an investment property. Lower tax could mean more money to build your equity even faster, resulting in interest savings and greater wealth. A lower concessional tax rate may also apply to any capital gain on the sale of the investment property.
The typical superannuation portfolio contains fixed income assets, cash and shares. Acquiring an investment property may broaden and diversify your SMSF portfolio.
Greater purchasing power Use the funds in your SMSF as a deposit to acquire investment properties of greater value and higher quality, giving you enhanced long-term investment potential.
By taking advantage of the tax rate concessions available to complying SMSFs, you can build equity faster and own the investment property sooner. Under current taxation law, capital gains tax may not be payable on any capital gain on the sale of the property if all members of the SMSF have commenced drawing a pension. Competitive lending terms Loan-to-value ratios (“LVR”) as high as 80% for residential property and 70% for commercial property, in addition to attractive lending rates and extensive loan periods. Wide acceptance criteria there is not restriction to SMSFs of a particular size, nor requires a minimum level of contribution. All applications are reviewed on a case-by-case basis to improve your choice of options across residential and commercial properties.
* Source: Parliament of Australia Parliamentary Library Research Note no. 7 2006-07: House prices
Thankfully many large mainstream lenders, as well as specialist providers, have brought uncomplicated SMSF loans to market. These are available at standard home or commercial lending rates. The following is a summary of some of the features of SMSF loan structures:
Many people just don’t have sufficient superannuation assets to acquire an investment property outright. Or, if they do have enough superannuation assets to buy a property, having all or most of it invested in one property may result in an undiversified investment portfolio. Now you can have access to funds to acquire better quality properties with more potential for higher rental yields and stronger capital gains, this allows you to build and benefit from a balanced investment portfolio as shown in the following scenario:
Rhonda is 45 and runs a growing architecture practice that is in desperate need of more space. At the same time, after years of contributions and recent poor returns from retail super fund, Rhonda wants to take more control over her investment choices and drive more growth from her $180,000 super balance. Rhonda has identified new commercial premises that are perfect for her growing business and which she believes should appreciate strongly over time. However, Rhonda currently rents her business premises and she would need to divert valuable cash flow from her business to acquire this $300,000 property. Rhonda feels she is missing out on a big opportunity.
Rhonda visits a finance broker who shows her how to achieve her personal and investment goals with a SMSF loan. Rhonda can use $150,000 of her $180,000 super fund, being $120,000 as she is borrowing 60% plus she has estimated stamp duties and all other costs and allowed up to $30,000 for these, leaving $30,000 in other assets. By borrowing $180,000 with a SMSF Super loan, Rhonda can also increase her wealth accumulation base from $180,000 to $330,000. The finance broker strongly suggests that Rhonda seek advice prior to going ahead from her Accountant and Financial Planner if she has one. Rhonda’s tax advice is that she can claim a tax deduction for lease payments made to her own SMSF and the SMSF can claim a deduction for interest paid on the Super loan as well. Rhonda’s advice is also that additional superannuation contributions (up to an available limit) will be taxed at 15%, as opposed to her top marginal tax rate of 46.5%. These additional contributions can also be used to repay the Super loan to build equity even faster. Over time, the Super loan balance will be repaid and Rhonda’s wealth will grow as capital gains and positive rental yields are realised. Super loans allow Rhonda to achieve her investment goals sooner as the SMSF income is taxed at concessional rates.
Prior to entering a Super loan arrangement, it is crucial that you consider the financial status of your SMSF and the investment goals of its members to make sure that a Super loan is an appropriate product that accounts for all parties’ needs. It is important that all members and trustees understand the particular risks relating to borrowing by an SMSF, including, amongst others, the risk of the loss of capital from adverse movement in property prices, the on-going costs of property ownership (such as property maintenance) and the need for ensuring that the SMSF remains compliant at all times with all applicable laws. You should seek independent financial, legal and taxation advice before investing in property with Super loan.