Buying property with your super is one way that thousands of Australians are now building their retirement “nest egg.” The question is it a viable option? What are the benefits and downfalls of doing it? And how do you do it? In this article we will explore the “super buyer” process. Buying Property with Super
In order to invest in property you require to have your superannuation going into a Self Managed Super Fund (SMSF). This can be organised through your accountant and is helpful as they can advise you on the following:
- The tax benefits and rules;
- How much you need to have in super to be eligible to purchase property;
- Is purchasing property investment suitable for you?;
- Set-up and structure the SMSF.
The Superannuation held in the SMSF cannot fund the full purchase price of the property. The SMSF does however need to have enough to fund between 20%-35% of the purchase price plus the other costs involved. The SMSF can purchase the property by borrowing the remaining funds to purchase property. The property is the security for borrowing under a ‘limited recourse loan.’ What is a limited or nonrecourse loan? A nonrecourse debt is a type of loan secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.
Therefore if you default in this situation the lender only has recourse to the property and cannot claim any other SMSF assets. The property is held in trust for the SMSF thus is entitled to income. Your SMSF makes any necessary loan repayments thus paying of the loan. After the loan period the legal ownership of the property can be transferred to the SMSF. Below is a flowchart to show the process – from Pinnacle Tax and Accounting (http://www.ptagroup.com.au/).
So what are the benefits behind investing your hard earned Superannuation in Property?
- There are a number of tax benefits these include:
- No capital gains once members retire;
- Loan repayments can become tax deductible (provided you partake in a salary sacrifice);
- Negative gearing benefits inside the SMSF;
- Income after expenses and any capital gains on the disposal of the property is taxed at a maximum rate of just 15% compared to 46.5% that regular investors would pay;
- Assets held by SMSF will normally be protected against general debt recovery and bankruptcy proceedings;
- Rental income from property can be used to help repay the loan;
- Employer superannuation contributions can be used to help repay the loan.
What you should be cautious about?
- The loan will incur a higher interest rate compared to others;
- The cost of having a self managed super fund and setting it up can be quite costly – it is important that it is set up by a professional and then there are ongoing costs associated with this;
- You need to ensure your fund has enough cash to pay all liabilities;
- The loan needs to be eliminated before retiring otherwise you will be dependant on cash flows from other investments to service the loan;
- Negative gearing has limited tax advantage due to the low tax rate;
It is so important that if you go down the road of a SMSF property purchase that you are fully compliant. If a trustee is found by the ATO to be non-compliant you maybe subject to the higher marginal tax rate of 46.5%. If done correctly this can be a beneficial way to invest in property and your retirement.