With Australia’s appetite for property showing no signs of abating, we’ll forgive you for thinking that everybody has an investment property. Traditionally, Aussies have purchased investment properties personally or through a company. But you can now buy an investment through your self-managed super fund (SMSF).
We’re here to show you why more and more people are using their SMSFs to purchase an investment property. While investing outside your SMSF is simpler and there are fewer restrictions on what assets you can purchase, a well-managed SMSF can increase your wealth and reduce your tax bill! We call that a win.
Pay less tax
Come tax time, SMSFs pay less tax on rental income. That means your fund can focus on paying back your loan to purchase the property sooner.
Rental income is taxed at 15% and providing the property is held for more than a year, capital gains at 10%, which is lower than most personal investment properties. Once you retire and draw a pension from your fund, both of these are reduced to 0%.
For direct investors in low tax brackets, there are also fewer benefits than with an SMSF-purchased property.
Buy your retirement home
While you can’t live in an investment property that your SMSF owns, or rent it out to family or friends, you can buy a retirement home through your SMSF. Once you retire and draw a pension from the fund, you may be able transfer ownership to yourself. It is worth noting that this is dependent on the property's maximum value against the maximum pension value. It’s the perfect investment for anyone planning a sea-change or tree-change in their golden years. Remember though, you will have to pay stamp duty on this transfer, so factor that into your calculations.
With property prices continuing to rise, taking advantage of lower prices now rather than in the future could be a prudent investment strategy.
Your SMSF is your landlord
If you run a business, you can lease the property your SMSF owns if it is a commercial property. Forget paying off someone else’s mortgage – your fund is the landlord! As an extra perk, your business can still claim rent paid as a tax deduction. Note that any rent must be paid at the market rate, every month – ‘mates rates’ are strictly forbidden and the Australian Tax Office requires detailed evidence of this in the fund’s annual tax return.
You can create an SMSF with friends or family to pool your resources. This allows the fund to buy more expensive properties – such as large commercial assets like a warehouse or office building. This lets you get more bang for your buck as the larger the investment, the more tax you will save, especially if you wait until the fund’s members are retired and receiving a pension from the fund.
A good property purchase made by your SMSF has the potential to grow your wealth through capital gain, providing an income rental and minimising your tax liabilities. If you want to learn more about SMSFs, download an today.