Self-managed super funds now gearing into the property market

Self-managed super funds now gearing into the property market

Many investors know the attraction of negative gearing for property investment. And a number of years ago, super rule changes opened up the way for self-managed super funds (SMSFs) to access this powerful investment strategy.

 Matthew McCabe* from Judge Financial Planning commented on the surge in interest from many SMSF clients. “It’s not that surprising that those who like the direct control of self-managed super are often also very interested in the benefits of gearing into property investment. Super rules allow self-managed funds to borrow and this has opened up the opportunity to use gearing to buy direct property assets as part of their SMSF portfolio”.

Guidelines on how the borrowing and purchasing are arranged are strict, but as long they are satisfied and the purchase suits the overall fund investment strategy, it can be a highly rewarding and tax-effective option to build retirement assets.

A tax-effective strategy

Matthew McCabe explains that many are attracted to the unique tax concessions that this opportunity presents. “Rental income generated from your property investment is normally taxed at marginal rates, but within an SMSF it will only be taxed at a rate of 15%, which may be lower than your marginal tax rate. Furthermore, if sold before retirement, the property proceeds will generally only attract capital gains tax at the effective rate of 10% (subject to the property being held by the SMSF for 12 months or more). After retirement there is generally no capital gains tax liability and no tax on rental income from the property.”

Add to this, the normal tax deduction opportunities that gearing offers on property upkeep and you have a very tax-effective strategy to complement other investments within your super fund.

Apart from the tax concessions, many are simply attracted to having the direct control and freedom of a ‘hands-on’ investment, where they can get involved in finding and buying a property and see a tangible asset that is growing in value towards their retirement.

Mr McCabe identified that interest is also coming from businesses that already own commercial property. “What they can do is have their self-managed super fund buy the property from their business, which in turn releases cash within the business to invest in more productive ways. It’s a very neat solution”.

 

A structured approach is essential

The many benefits of this strategy need to be tempered by a rational approach to how it is implemented. The guidelines are strict and the penalties for non-compliance are severe.

Mr McCabe recommends a cautious approach and professional assistance to help you understand the risks. “My first priority when advising clients is to impress upon them that this is a far more complex situation than normal property investment gearing, in terms of the borrowing and ownership structures that are required. It is vital to involve their legal and accounting specialists in the process and follow a carefully mapped out sequence to make sure it is above board”.

While the suitability of the strategy will depend on individual circumstances, the basic steps involved in implementation and keeping within super regulations can be summarised in the following key steps:

  • engage a financial adviser to manage the process and co-ordinate legal and accounting involvement
  • check that the fund’s Trust Deed permits borrowing and has a stated strategy that will accommodate direct property investment
  • establish a limited recourse loan and a security trust arrangement – this is the approved mechanism enabling the SMSF to invest directly in property
  • consult with your financial adviser on the appropriate levels of existing fund assets that can be directed into a property purchase
  • source lending that complies with SMSF borrowing rules – specifically, in the event of default, the lender can only claim on the property itself and not other fund assets
  • negotiate the property purchase
  • arrange ongoing procedures – the SMSF will service the loan and will directly collect interest on the property. Regular review, valuation and tax reporting will be required to maintain compliance with regulations.

The selection of property is something that obviously is of great interest to those who can access this strategy. McCabe again referred back to an appreciation of the rules and what is permissible.

Matthew McCabe’s final word of advice, “the opportunities are great but the obligations are serious, so get advice from someone who specialises in this type of advice.”

 

We are ready to help. We are equipped with the knowledge and expertise to help you get the most out of your SMSF, by showing you how to set up and develop a sound investment strategy that reflects your needs. Contact our office today on 02 4032 7934, or you can send an email to mmccabe@judgeaccountants.com.au

 

 

 

*Matthew McCabe is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), AFSL 238429. This editorial is current as at July 2015. The information provided in this document, including any tax information, is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out. RI Advice Group Pty Ltd ABN 23 001 774 125 AFSL 238429.