Should I buy property with an SMSF?

Using a self-managed superannuation fund to buy a property for wealth creation allows you to use your super fund balance as leverage. In most cases, you can borrow up to 80 per cent of the property value. Your super fund will contribute a 20 per cent deposit, plus around 5 per cent for purchase costs such as stamp duty.

So it is easy to see why taking advantage of this ability to borrow using an SMSF is gaining popularity. The significant tax benefits within super grow your retirement nest egg much faster because rental income on a property held inside super is taxed at just 15 per cent compared with up to 45 per cent depending on your tax bracket outside super. In the event of a sale post-retirement, any capital gain is tax-free. The more tax efficient you are able to retire, the more money you’ll have in your pocket to plan your perfect lifestyle in retirement.

To qualify and employ this super strategy, you need to meet TWO conditions:

1. Have a household income of at least $80,000

2. Have a combined super balance of at least $100,000 between you and your partner across all super accounts

Key benefits of having a SMSF:

Given super is compulsory, an SMSF allows you to choose the assets (including property of choice) you want to invest in. When you set up an SMSF, you’re in charge and you make the investment decisions for the fund and you’re responsible for complying with the law. It’s a major financial undertaking and you need to have the time and skills to do it. Therefore you should consider professional advice to explain the different ways an SMSF can benefit you, for example:

• Ability to reduce income tax on investment income and capital gains
• Increasing your flexibility of investment choice, asset selection and giving you control
• Ability to manage the risk profile of your investments
• Managing the income streams at retirement for you and other members of the SMSF
• Ability to transfer personal assets (shares, gold, art, property etc) into your SMSF
• Pooling assets of up to four members into the SMSF will save on costs

So if you like property as an investment class, only an SMSF allows you to purchase direct property with your super money. But there are some common SMSF property rules you’ll need to follow.

The property:

• 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 member's related parties
• Must not be rented by a fund member or any fund member's related parties

An example:

Difference of financing a property inside super v. outside super

Two couples purchase an investment property for $400K at age 40 with a 20 per cent deposit. They have a combined family income of $100,000 with one partner earning $70K and the other $30K. The only difference is that Couple #1 buy the property outside super whereas Couple #2 purchase a property inside an SMSF.

Fast forward 20 years. Both couples are now 60. Couple #1’s property is worth $1,282,854, and they hold $962,854 equity in the property. After rental growth, the weekly rent is now $1,283 but of that the couple take home only $1,029 a week after a marginal tax rate of 32.5 per cent is applied. If they sell instead, they would come away with $761,909 in cash in after costs and capital gains tax of 22.5 per cent.

Not a bad result, but compare that to Couple #2 who bought their property within their super. Couple #2’s property is worth the same: $1,282,854. But because of the tax advantages, they also hold $962,854 in equity plus an additional $77,083 in savings accumulated along the way. The weekly rent they now receive is $1,283, which is 100 per cent tax-free. That accounts for another $254 per week more than Couple #1. If Couple #2 decided to sell their property, they could do so without paying a cent in capital gains tax. The net result is that they would come away with $998,022 in cash after all costs which is $236,113 more than Couple #1 – all because they chose to invest with an SMSF.

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