If you love property, here is another reason to get excited!
Borrowing to acquire property using your self-managed superannuation entitlements is possible, but can be restrictive up until recent positive changes.
However, this financial strategy been supported with revised legislation that will now enable super investors to plan for the future, with greater confidence, by having choice and control of what you prefer to invest in, and managing your costs in doing so.
“As consumers we borrow : to buy our home, finance a car, invest in shares and property, and we can now also borrow to acquire residential, commercial or industrial property, within our self-managed super funds”.
”The Power of Leverage … why would you borrow to invest in property with super?”
Leverage is using other peoples money when you are investing.
How this can positively impact your investment is, by way of example :
- Property $650,000
- 20% deposit $130,000 invested
- Capital Growth @ 5% pa = is on the full value of $650,000
- Rent Achieved is also on the full value of the $650,000
- After 10 years your capital growth value of the investment at 5% pa compounded could be $1,058,782
- And 10 years of Rent at only 1.5% CPI increases could be around $308,230
- And all you have really invested (aside from the loan), is $130k
- Logically, the rental income over just 5 years, will return your SMSF your original $135k deposit. Meaning your SMSF now owns an Investment Vehicle for *free
Is this good or good! This is the power of Leverage.
*simplistic helicopter example provided to merely outline the financial power of Leverage + Compounding Returns
We recommend that you ask your financial planner/accountant, to discuss the available tax benefits to be gained by choosing to invest in property with your self-managed super fund capital. Such as:
- Capital gains tax
- Rental income tax
- Salary sacrifice tax
- Superannuation pension tax
- Writing off Depreciation against Super Contributions
Benefits of Investing in Property in your Self Managed Super Fund
Undoubtedly the greatest tax benefit associated with investing in property within a Self-Managed Super Fund (SMSF), is the potential Capital Gains tax Concession on capital growth.
As per the ATO web site : “If the property is sold while in accumulation phase after being held for more than 12 months, a 10 per cent tax rate applies. However, if that same property is sold after the super fund has converted to pension phase (in retirement), zero per cent tax applies.”
The longer you hold the property, the greater the likely capital gain, and the larger the tax benefit. It doesn’t make cents, it makes dollars!
Rental income on properties owned by your super fund is also concessionally taxed. Another fantastic financial gain within your super. As with capital gains tax, in the pension phase, no tax will apply to rental investment income, and a flat 15 per cent will apply in accumulation phase. This is also extremely favorable when comparing neutrally or positively geared property, with rental income taxed up to 46.5 per cent, for property held in an individual’s name. This is not advice, ask your accountant/financial planner to explain.
The Australian Tax Office allows individuals to make pre-tax salary-sacrifice contributions into super, paying 15 per cent contributions tax in super, whilst saving marginal tax in their own name. Which again could be up to 46.5 per cent. More after-tax dollars to invest, results in greater wealth being accumulated by you, and/or more personal debt to be repaid.
You may not be aware, that at age 55, workers (employees or the self-employed) can establish a “transition-to retirement, account-based pension”.
Your financial planner/accountant will explain how you can take advantage of this legislation and how Superannuation pension payments can be received, while working full-time or part-time. The benefits are twofold. First, in pension phase, as stated above, investments will be capital gains and rental income tax free. Secondly, pension payments made from super to an individual are also concessionally taxed and will be tax free from age 60.
Therefore, the typical transition-to-retirement financial strategy involves swapping higher taxed salary income, with lower taxed pension income, thereby allowing additional salary-sacrificed super contributions to be made.
"How can this investment opportunity be exploited, when investing in Property using a SMSF, you may ask?"
While the rules and regulations of borrowing, to acquire property in super have been revised, they are still complex and the costs of incorrect structuring and management can be harsh.
Here are some facts associated with taking advantage of the superannuation borrowing rules, known as “limited recourse borrowing arrangements” we found online and can share with you.
Your accountant or financial planner will better advise you : The Self Managed Super Fund needs to establish a new trust, if your SMSF will borrow funds to secure the asset. The name of this trust typically is known as a bare trust, custodian trust or security trust.
NB! Where there is borrowings, in order to avoid potential financial consequences of double stamp duties and non-compliance of the super fund etc, it is advised that superannuation structural planning is conducted, and that specialist financial guidance is sought, before property contracts are entered into and signed.
Despite the additional work and planning requirements involved in taking advantage of limited recourse borrowing arrangements within SMSF’s, the tax benefits associated with the strategy of potentially ending up with an "Income Tax plus a Capital Gains", tax-free property, making retirement all worthwhile!
Ask your accountant or financial planner to prepare a Statement of Advice on your behalf, share it with us and we will provide you with a selection of properties that could ‘best fit’ the guidelines in your statement of advice, we will also provide you with industry reports on why these properties could suit and ask that you make an informed decision prior to entering a contract of sale.
The properties which we select are purposefully matched to your reason for the investment, your requirements, preferred investment strategy and in line with your budget. The property we access is Australia wide.
Our strategy is to match the "investment vehicle' to your goals and purpose for the investment, removing emotion, ensuring the numbers which drive and underpin your investment stack up accordingly. Our 16 years experience as property consultants (plus 15 year prior experience as financial planners), compounded with your 24/7 market research allows us to identify which areas, what type of properties would 'best fit' your strategy and budget.