SUPERANNUATION
ABLE 2 BUY A PROPERTY IN 1 SINGLE BOUND!
It’s a bird, it’s a plane……NO! It’s SUPERANNUATION!!! Many of us still don’t know a whole lot about buying property with r Super fund. Yes! it is possible. Yes! it’s a big draw card. Yes! It potentially has gr8 tax benefits. 1st you’ll need a SMSF ( fancy abbreviation 4 a Self Managed Super Fund). 2nd you’ll need some gr8 advice. 3rd you’ll need to call us. Turn ur Super into Supercalifragilisticexpialidocious! Read on folks…..
SCARRED by heavy share market losses & encouraged by the perceived safety of bricks & mortar, more people r turning 2 property investment through their SMSF’s.
…& as the surge in SMSFs continues, so 2 does the expected increase in residential property investments.
A change in rules a few years ago opened the door 4 investing through super after it allowed DIY funds 2 borrow money 4 property assets.
According 2 the latest government data there r now 439,000 self-managed funds holding $421 billion, or about 1/3 of the total superannuation savings pool.
But given the average super fund balance in Australia is still less than $50,000, until recently there was no chance of investing in property without having to borrow.
Direct investment in property has traditionally been restricted 2 those with really big bucks in super or those borrowing 2 invest outside of super.
But buying property inside super is proving a big drawcard, mainly because of the potential tax benefits.
4 example, somebody in their 50s who buys an investment property outside super, then sells it 15 years later 2 fund their retirement, then has 2 pay capital gains tax which could amount 2 many thousands of dollars.
If the same property is held within a super fund, the tax can be reduced 2 zero if the property is sold after the super switches 2 pension phase.
But balanced against the positives of tax benefits & the extra control of ur assets within a self-managed fund r several negatives.
Is it a strategy u would be suited to? Let’s see….
COUNTING THE COST
The cost is often the 1st & biggest hurdle 4 investors.
Not only will it cost several thousand dollars 2 set up & run a self-managed fund, the general rule is u need about $200,000 2 make it viable but there r also costs related 2 the property strategy.
Self-managed funds have only been allowed 2 borrow 2 invest since the super rules were changed in 2007.
This process involves complex structures such as instalment warrants & bare trusts.
The set-up costs b4 being able 2 buy property through ur fund r usually expensive.
The loan agreement, costs 2 establish a bare trust with a company trustee & associated documentation can range from $2000 to $3500.
Financial institutions will charge their own establishment fees & there will b legal fees that can b more than $1000. Add 2 that the property costs, such as stamp duty & government fees.
HOW MUCH CAN YOU BORROW?
Financial institutions will typically let a self-managed fund borrow about 65-70 % of the property value.
4 a $400,000 property that means you’d need up 2 $140,000 deposit, b4 other costs.
External financial institutions will charge a higher interest rate normally 1-2 % because of the complexity of the arrangement.
TAX BENEFITS
There r attractive tax concessions 4 retirees holding commercial or residential investment property in super.
If an investor decides 2 sell the property from the time they have started drawing down a pension, no capital gains tax will be payable.
By holding ur property in super, any rental income is only taxed at 15% or not taxed at all during the pension phase. For those who instead like 2 turnover their assets, borrow freely against it or develop real estate, super may not b the ideal finance solution for u.
LEARN THE RULES
A key rule is that any borrowing must b through a non-recourse loan.
This means the underlying security 4 the loan must b the property in question. No other assets r allowed as security 4 the loan.
Everything must b at arm’s length. This means a self-managed fund cannot acquire property from a member of the fund, & a member or an associate of a member cannot use the property as a principal place of residence or any other purpose other than as business premises.
If borrowing 4 a property there r restrictions on improvements and redevelopment. A self-managed fund cannot develop or improve a property while it is still under loan. Only once a loan is fully paid out can u make improvements 2 the property.
We r sure u need more advice! What now???? Call The Novak Agency, folks – we r here to help!!! 1300 4 NOVAK or 8978 6888 24/7 – we never sleep!
THE TRAPS
Investors need to be “very, very careful”.
“There are many pitfalls to consider and the floggers of residential property investment are normally not qualified to offer proper self-managed fund advice,” he says.
One key trap is liquidity: You have to make sure that your fund has enough cash to pay liabilities and pension payments if a member receives one.
“This can become quite difficult if the tenant suddenly stops paying rent and not enough cash has been left available,” Mr Whitford says.
Mr Steer says another trap is not eliminating the loan before retiring.
“If a self-managed fund buys property, they must be sure they can take care of the loan before retirement.
“Otherwise they will be dependent on cash flows from other investments to service the loan,” he says.
Negative gearing so popular among many real estate investors has limited tax advantage for super funds.
“Negative gearing would be a poor objective for super funds buying property because the tax rate is only 15 per cent. Instead they need to think about maximising cashflows and capital gains down the track,” Steer says.
HARSH PENALTIES
KPMG’s Tragakis says the Australian Taxation Office continues to look closely at super fund investments.
If a trustee is found by the ATO to have a non-complying fund, the total assets of the fund will be subject to the higher marginal tax rate of 46.5 per cent. In addition, income received in the year a fund is non-complying will also be taxed at this rate, he says.