I have been thinking about purchasing a second residential investment property, and my friends suggested that I can use my super for a deposit if I establish an SMSF.
I am about 15 years off retirement and currently hold my super in a retail fund which has been a strong performer. I run a small business, have adult children and want to take greater control of my superannuation. SMSFs are popular amongst those in my networks, but I see many mixed messages in the media, so, how do I determine if an SMSF is right for me?
Dear Interested Investor
Self-Managed Super Funds (SMSF) are the largest and fastest growing segment in the super industry, and recently there has been a lot of conflicting views about the merits of residential property investment in super – even the RBA has weighed in on the debate. So we’re glad you’ve sought sound advice.
How can you buy property as part of an SMSF?
Historically, borrowing for super has not been allowed, but the ATO relaxed its rules in recent years and you can now borrow in circumstances where the security the lender holds is limited to a single asset. This is known as a Limited Recourse Borrowing Arrangement (LRBA).
This means you can borrow to buy a large single asset like a house, apartment or business property within an SMSF.
Why buy property through an SMSF?
Using your existing superannuation as a deposit may result in a much bigger deposit than you could otherwise achieve. As a result debt levels may be much lower than if you bought the property outside of super.
The main advantage is that with lower debt, rent received from the investment property, regular super contributions, and salary sacrificing (pre-tax dollars) you should be able to pay off the debt of the investment property at an accelerated rate.
But you won’t receive all the tax benefits of negative gearing
If you buy a property outside of super, you receive a deduction for your expenses, (interest payments, body corporate, maintenance etc.) at your marginal tax rate which could be up to 49%. Inside super you only receive a 15% tax deduction for these expenses.
But working out whether to buy a property inside or outside of super is more than just a tax question.
You should also consider:
How soon do you need pension income from your superannuation?
If the only asset in your super is the property, you could be at risk. Remember that property is illiquid; you can’t sell one bedroom if you need money in an emergency.
Secondly, property doesn’t always generate enough cash flow after rates, insurance, body corporate costs, maintenance etc. to meet minimum pension payments which start at 4% per annum.
A diversified investment portfolio including property, fixed interest and shares will typically generate a more flexible retirement income and is an important component of managing risk.
Ensure you don’t lose your valuable insurance
If you move to an SMSF without addressing insurance you may lose any existing cover (such as Life and Disability insurance) you have in your retail fund and find that obtaining new insurance is more expensive or even impossible if your health situation has changed.
You can still take control of your super without an SMSF
If you decide a second investment property is not for you but you still want more control of your super, then a wrap account might be for you.
A modern superannuation administration platform (often known as a “wrap account”) can offer you almost all of the investment options of an SMSF; Australian shares, international shares, property, infrastructure, cash – with a lower cost structure and simple portfolio and tax reporting. The only assets you can’t include in a wrap are direct property and collectables or other ‘exotic’ investments.
Keep in mind
As a small business owner, you will create the most wealth for your family when your time and efforts are focused on the success of your business.
Establishing an SMSF is complex and time consuming, and there are many pitfalls along the way. You take on considerable legal responsibilities as a trustee of your fund and rules governing SMSFs are always changing. Failing to comply can mean facing penalty tax rates.
How we can help
FMD Financial manages over 200 SMSFs, and many of these funds have exposure to property. We are very objective about an SMSF structure and we work in conjunction with your accountant to ensure the best outcome is achieved.
We also engage in a relationship that stays with you for the life of the fund and provide greater insight into financing, investment selection; asset allocation and cash flow.
Considering an SMSF or have questions about your super or financial future?
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.