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Using your SMSF to invest in property has been getting some negative press lately. Are these concerns valid? What can go wrong when you use your SMSF to invest in property?
Buying a property through super is not the magic bullet many are currently promoting. Not only is it costly to set up – but the ongoing costs, personal responsibility as trustee and management can often leave you significantly out of pocket.
The first thing to consider is what tax deductions you will be able to claim (such as interest, property expenses and depreciation). If these are significantly more than the rent from the property, then in most cases you’d be far better to hold the property outside of superannuation enjoying these deductions at your marginal tax rate up to 46.5 per cent rather than the low maximum tax rate of 15 per cent in super.
Investors also often get caught up on the benefit of a lower or no tax payable on the capital gain through the superannuation system. However if you are planning to keep the property into retirement and have no other income outside of super, you will be surprised how little the capital gains tax bill may actually come to. For example on a $400,000 total capital gain, you will only pay $70,000 in tax – an effective rate of just 17.5 per cent.
Dominique Bergel-Grant, founder and director, Leapfrog Financial