This month I wanted to focus on an investment strategy that may be of interest to some of our clients. I’m very passionate about superannuation, as it is the most tax effective way to build wealth for retirement, and there are many ways to make your superannuation work harder for you.
The strategy that I will be focusing on is purchasing direct property using superannuation. This is not available through an ordinary superannuation account. It requires certain structures to be in place. A Self-managed super fund (SMSF) to be established. It also requires a bare trust to be established also. The bare trust will be the legal owner of the property and will be used to secure the funding by obtaining a SMSF loan against the property.
Once you have purchased the property the SMSF will receive the rental income and the SMSF will pay the interest to the bank and will also be responsible for covering the management fees and maintenance costs of the property. Once the loan is fully paid the property is transferred to your SMSF.
You might ask why would you buy property within SMSF over outside of superannuation? I can think of a number of reasons.
- Firstly, you may not have enough equity or enough capital for the initial deposit.
- You may be on a low marginal tax rate, reducing the benefits of negative gearing.
Some of the key tax benefits to purchasing property within SMSF include:
- Buying and holding an investment property until retirement means you will be generally exempt from capital gains tax. If you decide not to sell and retain the property in retirement the rental income will be completely tax free.
- Alternatively, if you sell the property during accumulation phase and hold onto it for at least one year, your fund will only pay capital gains tax on the sale of the property of up to 10%.
Now, 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).