SMSF allows borrowing to purchase property using your superannuation balance as a deposit
When the correct financial analysis is performed and an appropriate property is acquired, there should be no need for Members to subsidise this investment strategy from their own cashflow. Property inside Super should be a long-term, set and forget strategy.
One of the reasons Self Managed Super Funds (SMSFs) have become so popular in the past few years is because they allow you to borrow money to purchase property using your superannuation balance as a deposit. Since borrowing to invest in property within the tax friendly superannuation environment became legal in 2007, Australian SMSF balances have grown to a whopping $1.5 trillion.
SMSFs also allow you to pool your superannuation balances with up to 3 other members as to increase your overall holdings and consequently your investment choices.
The standard Property in SMSF arrangement looks like this:
Husband & Wife who have the same long-term investment objectives combine their super balances. He has $90,000 in two different retail funds and She has $60,000 in an industry fund. They establish a SMSF and an appropriate trustee structure and roll their entire balance from all three funds into their new SMSF. They use $80,000 of their super as a 20% deposit on a $400,000 residential property and utilise another $20,000 to cover stamp duty and other purchase costs. They borrow the other $320,000 from a bank to complete the property purchase. They still have another $50,000 in their SMSF which they have not used for this purchase. This $50,000 would normally be held in a combination of shares and cash investments. This provides liquidity and diversification to the portfolio.
The bank lends the money on what is called a limited recourse borrowing arrangement. This simply means that they only hold security over the property of which they have lent the money on. The lender does not have access to the balance of your superannuation (the cash or shares) within your SMSF should something go wrong.
In reality, these arrangements are quite secure from the lenders perspective as the overall strategy is usually positively geared with the SMSF receiving regular inflows from rental income, SG contributions (currently 9.5% paid by your employer), any additional salary sacrifices you may choose to make, and the income earned by your cash and share investments. All ongoing property expenses, including the interest on the new loan, are paid from the SMSF.
How to buy property in super
Stephen Vick (Director of Nexus) discusses the distinct advantages of holding property within super and explains the processes involved to acquire your very own property using your superannuation.
Want to use your super to invest in property? There’s value in seeking advice early on, even if it’s over the phone. If you have questions call 1300 473 347 or book a Free SMSF Consultation.
If correct financial analysis is performed and an appropriate property is acquired, there should be no need for the Members to ever have to put their hand in their own pocket to subsidise this investment. Property in Super should be a long-term, set and forget strategy.
There are many other benefits to this strategy, such as:
- Your deposit and all acquisition costs are paid using pre-tax super monies
- All rental income received is taxed at 15% and not at your personal marginal tax rate
- Capital gains tax is reduced to 10% if the property is held for more than 12 months and zero if held to retirement (and converted to an account based pension)
- Direct property can provide diversification and reduce the overall risk to your superannuation portfolio
- There are no margin calls associated with borrowing to purchase property within SMSF
- You can pool your balances with relatives (up to a maximum of 4 members) and increase your leveraging and purchase options
- There is no limit as to how many properties you can acquire within the fund
- You have control over everything that is invested within the SMSF
- You can sell the assets when the timing suits you and minimize your tax liability
- Upon your death the distribution of assets can be structured in a tax effective manner and the benefits diverted to the right people at the right time without fear of contest
- You can pay your Life, TPD and Income Protection insurance premiums with your super monies
- You can outsource the implementation and ongoing management of the fund to professionals making it an easy and hassle free long-term strategy
Things to be aware of:
- Not all banks provide limited recourse borrowing arrangements
- The lender’s serviceability criteria is significantly different compared to purchasing investment property outside of super
- The pool of SMSF properties is smaller than the general investment property market as not all properties can be purchased within SMSF
- The lending arrangements, the trustee structure, the type of property, the taxation implications, and the overall cash-flow position of the SMSF all have an affect on each other and should be considered together before acquiring a property
- The sole purpose of the SMSF is to provide for your retirement and therefore fringe benefits such as purchasing a property from a related party or using the property as a holiday home are not allowed
- The costs of running an SMSF can be greater than or less than the overall running cost of a retail or industry fund, depending on the size of the fund and the overall investment composition
- The acquisition costs of a property can represent a larger total management cost than that of holding shares. This is usually reversed over time
- As with all superannuation investments, you cannot access the fund for personal use until you meet a condition of release
- The SMSF must be audited annually. The cost of this can be reduced with simplified reporting via Wrap accounts etc
- The SMSF trust deed must allow for borrowing within the fund and contain a documented investment strategy
- The SMSF trustees must consider appropriate insurances as part of the investment strategy
There are many obligations and responsibilities of the Trustees of a Self Managed Super Fund and significant criminal and financial penalties may apply should these not be headed. It is important to seek professional advice from a qualified financial adviser before entering into such an arrangement.
Nexus Private are specialists in SMSF strategies and investment property acquisition. We can assess the appropriateness of purchasing property inside Super for your specific circumstances. We can also arrange every part of the process from establishing the fund, rolling over benefits, arranging finance, sourcing the property, and implementing the insurance and estate planning requirements. We will guide through the strategy establishment process and assist in the ongoing supervision and performance reviews.
Nexus Private Wealth Management and Property Advisory – Connected Advice, Strategic Thinking.
See why portfolio growth improves substantially when coupled with the right financial structure