Property Tax Tips: Types of investment structures – Self Managed Super Fund

A Self Managed Superannuation Fund (SMSF) is a super fund that you operate and run by yourself, giving you control of your assets that will support your retirement. You get to decide where and when you invest the assets of your fund (within legislative constraints). Traditionally, SMSF’s have not really attracted the attention of investors until changes to the Superannuation Industry Supervision (SIS) Act in September 2007 made it a whole lot more attractive.  These changes now allow a SMSF to borrow funds to acquire an asset (subject to certain conditions).

For investors, this now means that a SMSF can purchase property in much the same way as anyone else would, including taking out a loan if necessary. The property will be held in a trust, commonly a ‘bare’ trust where the trustee simply holds the property on behalf of the beneficiary but has no other duties. The legal owner of the real estate will be the Property Trustee of the trust, whilst the beneficial owner will be the Trustee of the SMSF. Once the mortgage is paid out in full, title of the property can be transferred to the SMSF.

This legislative change opens a whole new world of tax and other possibilities that cannot be ignored.

Advantages

• SMSF’s can now acquire property with as little as a 20% deposit (plus costs, and assuming up to 80% borrowing from the lender), meaning theoretically $150,000 in your fund is enough to consider this option. 
• From a taxation point of view, contributions are taxed at just 15%, and the SMSF pays only 15% income tax and capital gains tax (CGT) of 10% if the property’s been held for more than 12 months. Additionally, once you enter "pension phase" potentially no tax is payable.
• Interest payments are tax deductible.  You may also effectively receive a tax deduction (via making a salary sacrifice contribution and lowering your income tax) for loan repayments of the principal as well.
• Asset protection because the lender has ‘limited recourse’ to recover monies. If the SMSF is in default, the lender is limited to only the property securing the loan and no other assets of the SMSF.
• Once the loan is paid out and the property is transferred from the trust to the SMSF, CGT, GST and stamp duty will not apply (if the purchase is structured correctly).
• You can sell a commercial property you already own to your SMSF, and you or a related party can rent any commercial property held by the SMSF provided it’s for business purposes.
• You can combine your super with up to three other family members within a SMSF to increase your investment potential.

Disadvantages

• You can’t access the funds and assets until your preservation age (generally 55-60) as an SMSF’s sole purpose is to provide benefits to its members upon retirement. To elaborate on this point further, you can not draw out and use equity growth to purchase other properties until such time.
• Expensive setup and maintenance costs, particularly as SMSF’s cannot borrow without establishing additional trust arrangements, and every fund must be audited each year.
• SMSF’s attract heavy regulation and you will be required to play an active role. You, and all other members of the fund, are required to all be trustees of the fund. You will be responsible for administration and accounting, managing tax implications, and preparing and implementing an ‘investment strategy’ (this is a legal requirement) to ensure the fund complies with all legislation. Non-compliance can result in severe consequences from financial penalties to imprisonment.  
• Although SMSF’s can now buy a host of different types of properties, they cannot buy any property from a member or related party unless the property is commercial and used for business purposes.
• As lenders have limited recourse available, the loans offered may impose stricter conditions and offer less competitive terms than regular loans.

Conclusion

SMSF’s are one of the more complex ways to invest in property and the decision to do so should not be taken lightly. It certainly holds a host of advantages, but the disadvantages are serious and need to be given thoughtful consideration. Typically, it is likely to only be worth consideration if you have accumulated a reasonable amount of assets in your superfund ($150,000 or more), but do seek professional advice to find out whether this solution is right for your circumstances.

Momentum Wealth and its affiliated entities are not Accountants or Financial Advisers. While all information is provided in good faith, you should seek your own independent advice in relation to setting up a SMSF.

To find out how Momentum Wealth can assist you in getting a loan to buy property in a SMSF, please contact our Finance Team on 1-800-000-159.