Property is synonymous with Australian investors and is typecast as bricks and mortar being safe as houses. It is for this reason that everyday Australians invest their hard earned dollars into property. Now, this is not news to anyone, what is news is the way in which property investments are made or the vehicle that is used to do so. Self-managed superannuation funds or SMSFs for short, is the means by which people are choosing to invest in property.
Property through super has been one of the fastest growing investments made by SMSFs and at 30 June 2013, represented 15 per cent of the total SMSF pool of $495 billion, according to the Australian Taxation Office (ATO). However, not to distort the facts, only 3.4 per cent was residential property. This is still no small amount at $17 billion.
A core driver towards the preference of investing in property through super was the change to the borrowing rules introduced by the Federal Government in September 2007. Such rules permit SMSFs to borrow, under a limited-recourse borrowing arrangement (LRBA), to acquire an investment asset.
For those of you unfamiliar with the term limited-recourse, it simply means, in this context, the lender (bank) has limited-recourse over the sole asset for which the loan is encumbered on. That is; in the instance the SMSF is unable to meet its loan repayments, the bank can only take possession of the asset for which such a loan is secured. Essentially, the SMSFs liability to the bank is limited to the value of the asset.
As many Australians are doing, if you are considering investing in property, a SMSF may be an option for you. The advantages lie in the fact that an SMSF is the optimal tax structure, with income and capital gains taxed at a rate of 15 per cent, or an effective rate of 10 per cent on capital gains if the asset is held for longer than 12 months. Furthermore, if you sell the asset when you retire and the fund is in pension phase, any capital gains on the sale of an asset will be tax-free. The tax benefits are unprecedented to that of any other structure.
Another advantage surrounds the availability of a larger pool of funds, being your existing super balance, to fund the deposit for the property.
On the flip side, it is a costly exercise to establish an SMSF and to facilitate the LRBA. Additionally, you require separate LRBAs for every investment you intend to leverage.
An SMSF isn’t for everyone and if now isn’t the right time, it is something that can be driven towards in the future. It is essential that you seek advice from your financial planner if you’re considering setting up a SMSF now or in the future.
Finally, a recent survey conducted by Newcastle Financial Planning identified that nearly a third (28.75 per cent) of its respondents were planning on making a property transaction in the next 12 months and over half (51.5 per cent) of those transactions are likely to be property investments. Of this, 36.36 per cent of respondents indicated that superannuation will be their main source of funding. Ask yourself the question; is a SMSF right for you?
Author: Adam Hoskins, SMSF Specialist and Head of Accounting at Newcastle Financial Planning
Disclaimer: This editorial provides general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your particularly investment objectives, financial situation and individual needs. Charter Financial Planning and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this editorial. Charter Financial Planning Limited ABN 35 002 976 294 AFSL Licence No. 234665. Principal Address 750 Collins Street GPO Box 2830AA Melbourne VIC 3000.