Borrowing to acquire property with self-managed superannuation entitlements has been possible, but restrictive up until recently.
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.
“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.
Why would you borrow to invest in property with super?
Investors realise that if they put down a 30% deposit and borrow the 70% from the bank (or themselves) they will achieve any capital growth on the full value of the property. See example below :
We advocate that you ask your financial planner to discuss the available tax benefits to be gained by choosing to invest in property with your self-managed superannuation capital; such as:
Undoubtedly the greatest tax benefit associated with investing in property within a Self-Managed Superannuation 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 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 allows greater wealth to be accumulated 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 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 actually 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, 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”.
Your accountant or financial planner will 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, in retirement can make it 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.
Fact : “a Tax Efficient Retirement Strategy will guarantee more money in your pocket !!”
Comments or questions are welcome.