More Australians are taking control of their superannuation because of the highly volatile world share market and uncertain future. People would rather control their assets directly and avoid unnecessary costs.
In the past decade, borrowing in super has also helped many investors leverage their superannuation to buy property, improve returns and reduce volatility and risk.
Leveraging your super is best achieved through an SMSF, which account for about 32% of all funds invested in superannuation, making it the largest individual super segment compared to other sectors, including retail and industry. However, if you want to do this, you have to consider many important factors to avoid costly mistakes.
You should know that an SMSF is a trust which should be controlled by a trustee, either a company or as individuals. There are certain rules which should be included in an SMSF for it to receive the tax and other benefits of super.
The rules of borrowing to purchase an investment property can be found under the general heading of Limited Recourse Borrowing Rules. These rules may be very strict but ultimately allow borrowing for the purchase of a property, including its costs, repairs and maintenance needs. Cosmetic renovations are often funded with internal SMSF cash reserves, though. It is not permissible to change the fundamentals of the property originally purchased as well.
Even if there is debt, the property cannot be held in the SMSF directly but should sit in a holding trust. The property can be used as security but banks often require other security and lend only 70% of the value at a higher interest rate. Members can also lend to their own SMSF but minimum terms have to be met under the rules set out by ATO. Otherwise, penalties will apply.
You have to plan for low valuation because any shortfall will have to be made up if the bank does not lend you the amount you asked for. The additional funds can come from cash in the SMSF or a member loan.
Your SMSF can buy any property type such as residential, commercial, industrial, mixed use or off-the-plan with debt. However, you can’t buy a residential property from a member or related party. You also can’t rent a residential property off your SMSF but you can rent or lease a commercial property as a business owner.
The tax rate on earnings in super is 15% and 10% on capital gains. This is better than an individual marginal tax rate that can go as high as 49%. Many people buy a home, pay it in super and sell to themselves in pension stage, where no capital gains tax is payable. There is still stamp duty, though. Another downside is that you or your family cannot use the residential property while it is in super in pension stage.
You can also negatively gear in your SMSF. When in pension stage, the fund does not need to pay any tax and the members don’t have to pay tax on the pension they get. In pension stage however, any rental income of capital gains are subject to tax. The ATO reduces your taxable wages by the shortfall of the rental income so you get a tax refund if you had not done a tax variation request to reduce tax on wages pay by pay.
If the property is bought outside super, the shortfall is payable to the bank and credit is received at tax time. If bought inside, you have to ask your employer to salary sacrifice any shortfall and reduce your taxable wages so your tax benefit is the same. The SMSF will receive this additional contribution and use it to cover the shortfall that the additional funds are used to pay the bank.
No tax is payable on the contribution so you have the same tax benefit as if you bought the property outside of super. The tax benefit kicks in in pension stage. It works up to the capped amount of the concessional contributions limit, which is $25,000 a year inclusive of the super guarantee from your employer.
You should talk to an expert to find out if the property you want to buy is suitable and can be purchased through SMSF. Know your finance strategy, availability, SMSF funds and appropriate documentation to use.
You should also seek advice on the tax implications and impact on insurances of moving funds and remember to avoid costly errors such as incorrect names or structures.
What can you do?
If you would like to know more about SMSF and property investment, you can click here to know more about Chan & Naylor services. You can leave your details here and we can schedule you for a free consultation. We’ll contact you to explain more.
Whether you are a beginner, seasoned investor or business owner, we can give you guidance to maximise the financial areas of your life. We can give you an integrated and tailored solution of your superannuation, taxation, property investment, asset protection, estate planning and more.
Chan & Naylor Group has nationwide offices in Brisbane and Capalaba in Queensland, Melbourne and Moonee Ponds in Victoria, East Perth in Western Australia, and South West Sydney, Parramatta, Pymble, North Sydney, and Sydney in New South Wales.
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