When it comes to purchasing an investment property, a big decision you’ll need to make is whether to use super to buy the investment property.
Unfortunately there is no one size fits all answer. It depends on what you are trying to achieve and the resources you have at hand. When it comes to purchasing an investment property, a big decision you’ll need to make is whether to purchase the property inside or outside of super. Unfortunately there is no one size fits all answer. It depends on what you are trying to achieve and the resources you have at hand.
Do you have what it takes to purchase a property through an SMSF?
There are much higher set up costs associated with purchasing a property through a self-managed super fund. As an example, you may need to have a combined superannuation balance of at least $200,000 to purchase a property worth approximately $600,000 to cover:
- the cost of setting up an SMSF
- high bank fees
- and the required deposit (lenders are requiring 30% deposit or more when purchasing through your SMSF).
If you can only just scrape together this balance it may not be in your best interest to tie up most of your super in an illiquid asset. Let me explain. Typically a property loan goes for 30 years, so unless you have many working years ahead of you, you’ll need to consider whether you have enough cash left in superannuation to cover pension payments. Secondly superannuation balances can be used to provide a much needed payout should you be diagnosed with a terminal illness. If all your superannuation is tied up in property you will not be able to access this quickly in the event of a terminal illness.
Is superannuation the best option?
If superannuation is a viable option, the next step is to consider why you are purchasing an investment property and whether purchasing through superannuation will allow you to achieve your objectives. To determine this let’s look at the benefits of using super to buy investment property.
Benefit of purchasing an investment property inside superannuation
Using your superannuation balance to get a deposit
For most of us, superannuation is one of our biggest long-term investments. You may well need to access this to be able to afford the deposit for your investment property. In this case purchasing through super is your only option. However if you have enough cash inside and outside of super then it pays to keep considering the benefits under each.
Minimise tax paid on investment earnings
Especially if you have a high yield property it may be appealing to purchase the property through your superannuation where any income earned will be taxed at 15% rather than your personal tax rate which is generally much higher.
If you plan to hold the asset until your superannuation is in pension phase, you may pay no tax on capital gains if your balance is under the $1.9M transfer balance cap. This can be a significant saving compared to an asset owned outside of superannuation, where you’ll pay tax at your marginal tax rate on the taxable capital gain.
If you don’t hold the asset until retirement you will pay 15% tax on two thirds of the capital gain on a property held for more than 12 months.
If you are looking for additional asset protection superannuation can be a great way to go. Assets held in superannuation are generally protected in a lawsuit and are not at risk of creditors.
Owning an investment property can provide diversification to your investment portfolio, which can help spread risk. This can be particularly useful if your superannuation fund is heavily invested in traditional assets like stocks and bonds.
Property has historically shown the potential for long-term capital growth. This can help your superannuation account grow over time, potentially providing a source of retirement income.
Purchasing your business premises (rather than renting)
If you are a business owner who is looking to purchase your business premises, superannuation can be a very appealing option. Business premises are generally high yield rental properties. By purchasing the premises in an SMSF business owners can minimise tax paid on rental income and can secure an asset for their retirement without changing their business cash flow.
Benefits in purchasing outside of super
Greater negative gearing opportunities
You can claim interest on a loan to acquire a property in a SMSF, however, the tax benefits here are less because:
– Generally the banks will only loan you 50 – 70% of the purchase price so you will have a smaller loan
– You are only paying 15% tax on superannuation earnings where as you are paying anywhere up to 45% on personal income tax.
Therefore if a property will be significantly negatively geared, and if you have a high personal tax rate, then it is likely that you will achieve a better tax outcome purchasing outside of superannuation. But to make an educated assessment, you would need to “do your numbers” using some assumptions.
Flexibility in how you use the property
There are a number of additional restrictions on how you can use properties held by SMSFs. Firstly you or any fund member’s related parties cannot live in or rent the property. The exception to this is a commercial property which can be used to house a fund member’s business. Also there are restrictions on improving a property that has been acquired by a SMSF using a loan.
The rules governing superannuation investments can change over time. There’s a risk that future changes in regulations could impact your ability to invest in property through your super.
If you borrow to purchase the property within your superannuation fund (using a limited recourse borrowing arrangement or LRBA), you may be exposed to additional risks if the property’s value declines, as you’re still responsible for repaying the loan.
If you use super to buy an investment property, particularly if it is a commercial property, it requires time-consuming paperwork and regular valuations. If ease of investment is a top priority you should think carefully before purchasing property through an SMSF.
At the end of the day whether you should use superannuation to purchase an investment property will come down to what you want to achieve. Superannuation may well present an opportunity to purchase a property that you could not do otherwise. It can also provide tax savings and better asset protection. It is definitely worth having a conversation with an experienced MGI adviser, particularly if you are a business owner, to explore whether you should be looking to at super to fund your next property investment.
Give the team of SMSF Accountants at MGI South Queensland a call or book an appointment for a review of your super strategy today.
This article was first published in December 2017 and has been updated and republished in May 2023.
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