An SMSF property loan can help you invest in property and accumulate wealth for retirement, so what are the pros and cons?
You and other members of the fund might have a reasonable amount of combined super saved inside your fund. Buying property through your fund might be a good way for you to achieve your goal of owning an investment property or owning your own business premises that would not be possible otherwise..
If you buy and hold property within your SMSF until you retire and then start drawing a pension from your fund, when the fund sells the property, the transaction will generally be exempt from capital gains tax. Also, any income your fund receives (ie rent) while you are drawing a pension will be completely tax free.
Before you start to draw a pension from your SMSF, any rental income generated will be taxed at a maximum of 15%. And, if the fund sells the property after holding it for at least one year, your fund will only pay capital gains tax on the sale of the property of up to 10%.
Comparatively, if you were to buy the same property in your own name, rental income would be taxed at your personal tax rate (which could be as high as 46.5%). This tax rate would also apply to any capital gains payable on the sale of the property (albeit after receiving a 50% reduction if the property was held for more than one year).
Benefits for business owners
If you own your business premises through your super fund and you lease it to your business, you rent you pay to your SMSF is generally tax deductible to your business. Given the relatively low concessional contribution limits that are currently available, paying rent to your super fund could be a great way to accelerate your retirement savings without exceeding the contribution limits.
Assets held in a superannuation fund (including property) are generally protected from creditors in a bankruptcy.
You will first need to consider transferring your existing superannuation fund into a Self Managed Superannuation Fund, if you haven’t done so already. More commonly know as an SMSF or DIY Super, and as the name infers, there are extra responsibilities and work involved . Most of the activities and management of your SMSF can be delegated to your accountant or financial adviser.
There are firms that provide all the functions that you would normally be required to perform as trustee, on your behalf. You can delegate the work load, yet not the responsibilities. As trustee for your new SMSF you are responsible for complying with the rules. You will need to consider and compare the costs and benefits, over your existing super fund, before travelling down this path and have a written investment strategy in place.
There are some rules when buying property within your SMSF, here are a few of the important ones:
- Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- Must not be acquired from a related party of a member
- Must not be lived in by a fund member or any fund members’ related parties
- Must not be rented by a fund member or any fund members’ related parties
The exception is buying your own business premises as mentioned above.
For a lot of Australian’s saving the deposit for an investment property is difficult, when no other equity is available. Using some of your existing super, along with an SMSF property loan can present an opportunity to enter the investment property market, which would not be achievable otherwise.
You will need to get professional advise, before you start. If your SMSF property loan documentation and contract is not set up correctly, reworks could be costly.
Matthew McDermott is principal broker at Australian Home Loan Brokers and can contacted on 1300 766 190 or click here for additional information.