Is buying a property inside your SMSF right for you?
I wrote this article because I always get asked this question. Since they were first introduced in 1999, the popularity of running Self Managed Super Funds (SMSFs) has spiked. Nowadays over 500,000 SMSFs hold almost $500bn of assets.
Part of the reason for this trend is that people can use these funds to either take the first step on the property ladder or to add to their property portfolios.
1. Tax Incentives
As smart investors we want to minimize our tax payments. It may pay to purchase property through your SMSF rather than outside as an individual private buyer, as it should mean you pay less tax.
With property there are two main taxes we need to consider – rental income tax and capital gains tax (CGT).
If we look at the relative effects of buying property as an individual, as a business, within a super fund and within a super pension (after you retire) we can clearly see the benefits of taking the SMSF route:
- As an individual rental income tax is up to 45% and CGT up to 22.5%
- As a business, both taxes are 30%
- Within a super fund rental income tax is capped at 15% and CGT at 10%
- Within a super fund both taxes are nil.
*CGT rates assume the property has been held for at least 12 months
Clearly you can save up to 30% on rental income tax and 12.5% on CGT by purchasing your property within your super fund rather than individually outside of the fund – potentially huge savings over the term of the property ownership.
Greater Investment Choice
Investing in property using your SMSF allows you more scope with the properties you can choose from and can boost your investment opportunities. Not only residential properties are available, but commercial properties too.
Options include the following:
- You can own your business’s real property through a superannuation fund, though not its operating assets.
- You can buy a business property from a fund member, a relative, or a related company, through your SMSF (though generally this does not apply to a residential property)
- You have more options to increase your buying power by borrowing funds to invest – through a ‘limited recourse borrowing arrangement’
- Adding members to a single SMSF (up to 4 members per fund) also increases your buying power and investment options
- It Generates Passive Income – A Goldmine!The purpose of any financial investment, once you start working, should be to start generating passive income streams. This is the key to creating a secure and comfortable retirement path where you can sit back and enjoy the fruits of your labour, rather than worrying whether it’s going to be enough.With Aussies living longer than ever and the cost of living rising, the time to start planning your retirement is while you have time and resources available to invest. For many that time is now and building a property portfolio through your SMSF is a great place to start.
Right For You?
Whether a SMSF is right for you will depend on the funds you have available, and the commitment to making investment decisions and meeting the legal and administrative obligations that come with being a trustee.
It also depends on getting the right financial advice. Those who do combine all these ingredients generally come out smiling. Feel free to let me know your thoughts as I am always happy to chat about this and answer any questions you might have.
We can help you make the right decisions for your future financial security. Start on the road to generating real wealth by calling Delta Financial Group on 02 9929 3343 or enquiries@deltafinancialgroup.