Self managed super funds (SMSFs) can do more than fund your future retirement. They can help you invest in property and enjoy financial benefits now and in the future. However, it’s crucial you consult a self managed super funds expert. Sinclair Wilson has an office in Warrnambool with fully accredited specialists on hand to solve your self-managed super questions.
Using self managed super funds to buy property is becoming increasingly popular but the decision to acquire property through your SMSF is one that requires careful consideration. It is also incredibly difficult to do without assistance from someone with expertise in the matter. An accredited professional will ensure that you don’t fall into the traps that have caused others to pay double stamp duty, or worse, force the sale of the property as it can’t be kept in the SMSF under the rules that apply.
You need someone who has prepared the required structure before, who can advise you on the pro’s and con’s of the various loans offered, who can ensure that your nest egg is protected and safe. You need that person to be professional, honest and forthright – to have no vested interest in the property purchase and receive no benefit (other than the agreed fees charged) so that they are completely impartial.
You need an accredited specialist.
Property in Warrnambool has proved a sound investment through the years.
Limited Recourse Borrowing Arrangements (LRBAs) have increased the popularity of property purchases in self managed super funds. The SMSF needs to have cash on hand to cover the deposit and the costs, but it is able to borrow the balance – most banks offer such products. The rules are much more strict than a normal home loan, a SMSF specialist can explain these and ensure your investment is safe. The SMSF trustees (e.g. you) receive the financial benefit from the purchased asset – you hold the beneficial interest in it. But the legal ownership of the asset is held on trust (the holding trust). All rent and growth ends up in the SMSF.
The upside is that with an LRBA, your whole super fund is not at risk if the loan is defaulted. There are also restrictions on the way a debtor can recover their funds. However a poor investment is always still a poor investment – doing it in your SMSF won’t change that. You want to have a comfortable retirement and good advice when contemplating this structure to minimises the risk.
There are significant advantages to having a property in a SMSF, including tax – income in your super fund is taxed at 15 per cent, which is considerably lower than most people’s personal tax rates. If you are in pension phase (post-retirement), the tax rate is 0 per cent – I know of no better tax rate than that!
If the property is sold during the accumulation phase (pre-retirement), the capital gains tax is calculated at a discounted rate of 10%. If the asset is sold while the super fund is in pension phase, again it is tax free.
However, there are a few things to bear in mind if you plan on setting up a SMSF specifically to buy property, whether it’s residential or commercial.
It’s important to note that you can’t buy a residential property to live in, or for any family member to live in. There’s a section in the legislation that the SMSF trustee, its members, or any relatives can’t benefit from the property –the property purchase must be for the sole purpose of supporting the SMSFs investment strategy in building wealth for retirement.
Most commonly, people use self managed super funds to buy a commercial property to lease back to their business. But the terms of the lease must be commercially competitive. You aren’t allowed to lease it back for “mates’ rates” to give your business a financial advantage. Indeed it is usual that you will want to charge your business a higher rent (for a bigger tax deduction for the business), but again this rental must be commercial.
Still interested?
Ultimately, the test of whether self managed super funds should be used to buy property comes down to making a rational investment decision based on facts and advice.
Consider the following questions about your prospective investment:
- Is the property a good investment?
- Will it appreciate in value?
- What is the yield?
- What are the risks?
For professional advice on these, and any other questions you may have, give me a call at Sinclair Wilson in Warrnambool.