Friday, 11th November 2016
Originally published on The Frontier Investor
You've bought a couple of residential investment properties and it's a given that you'll continue to build your portfolio… But whether you should buy through your self-managed superannuation fund or not depends on a number of factors. This wealth building strategy is not without risk, but can be worth doing with expert advice, says Smarter Property Investing principal and portfolio specialist Christine Williams.
Self-managed superannuation funds give Australians the option of choosing exactly how our retirement savings are grown. We can invest in shares, property or collectibles, amassing the assets we choose to build wealth and provide for our financial futures. The benefits of acquiring an investment property within an SMSF come down to the individual's age, stage and goals in life, but there's much to consider.
It's important to note that I'm not a financial planner and can only comment from experience of property investment within my own SMSF. Rather, these are some of the considerations you'll need to make when deciding whether this is a wealth building strategy you'd like to pursue.
The information contained within this article is general in nature and relates to SMSF rules as they apply in November 2016.
Numerous tax advantages
Your capital gains tax burden will vary depending on whether you're in the accumulation or pension phase of your SMSF. You will either have a maximum CGT of up to 15% or could pay as little as 0%. The former relates to anyone who is still working and putting assets into your SMSF and the latter is post-retirement. The rate of tax paid for investors in the accumulation phase is 10% on properties held for more than 12 months, or 15% for properties held for less than 12 months.
These lower rates of tax are of huge benefit to investors who would otherwise be at the higher end of the scale. That same property held outside of superannuation would attract capital gains tax at their usual tax rate.
How close are you to retirement?
Let's imagine that the area in which you've invested has sky-rocketed in price. You can see it's not going to last and want to sell this property while the market is hot. While you're at it, you want to transfer some of the profits for yourself and take a much-needed holiday… But if you've purchased this property within super, this scenario will be just another pipe dream.
The current government rules state that all proceeds from the sale of an investment property held within an SMSF must remain with the fund. In my opinion, this means that if you're aged between 20-30, this wealth building strategy really isn't for you. I believe there is more leeway outside super for a person of your age - but as everyone's individual circumstances differ, this is where you need to consult an expert.
Instead, because of the due process and restrictions as SMSF stands today, I see purchasing property within this vehicle as generally suited to wealth creators over the age of 45+ and becomes a definite once you've reached mid 50s. This puts you closer to retirement age and therefore, closer to being able to reap the benefits from this form of investment.
How much do you have in super?
Purchasing property within an SMSF is usually suited to investors with over $250K in their fund. You will need to have enough money to cover setting the fund up in the first place, then to cover any expenses associated with the property purchase. The deposit will generally come from the fund and you may cover the difference with a Limited Recourse Borrowing Arrangement (basically a form of mortgage available to SMSF holders, with very strict rules about lending), or through the fund itself.
Borrowing to purchase within SMSF's has become more restrictive in recent times and from my experience, investors will generally need to have about 40% deposit. It's well worth looking on your current bank's website to see whether they even provide finance for SMSF property investing, as not all currently do. Most banks will insist on a minimum of $250K within your fund before they allow you to borrow in this way.
As a portfolio holder, what property do you want to keep the longest?
The order in which you divest of (that is, sell) the investment properties within your portfolio can have a great bearing on your finances. Some properties may be a much longer-term prospect than others, which is why it can be best to put these kinds of investments into super.
Investment properties you're looking to hold for a shorter period of time can be best kept outside an SMSF due to the complicated nature of buying and selling within super as an investment vehicle. And as mentioned previously, any of the proceeds from properties sold within super must be kept in the fund until you reach preservation age (which ranges from 55-60, depending on your date of birth).
Get all of your ducks in a row
I've only touched the surface in this article as a springboard for you to take further considered action. If you're keen now to move ahead and purchase property within super, there's still much to learn before you decide to take this step.
It's essential that you seek professional advice with an SMSF adviser who has experience in this area. You will also need to a financial planner, accountant, solicitor, mortgage broker and property portfolio specialist. Go armed with a list of questions, take this article with you and highlight anything you need to know more about. Then put it to the sleep test - if you find yourself awake past midnight, something about the advice you've been given doesn't add up. Find another professional and move on.
Your SMSF needs to be set up properly from the start, especially when it comes to all-important considerations such as ownership structure and funding the actual purchase. I've been very happy with how it's all worked for me, but it was my due diligence at the start which has helped to make it such a great success.