13/10/2011
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Question: I believe that long-term property investment is much safer than investing in shares and would therefore prefer to use my superannuation to buy an investment property. Is this easy to do? I would be interested in buying a property by pooling my super, my husband’s super and possibly my brother and sister’s super together so that we can afford to buy a good property. Between all of us we earn approximately $300,000. Can we legally use our collective super to buy an investment property and, if so, how can we go about it?
Answer: There’s an increasing number of people who share your thoughts. Self-managed superannuation fund (SMSF) property investment is fast becoming a popular alternative for people who wish to diversify their investment portfolios over and above what a typical managed fund offers.
The following are just a few of the financial benefits associated with SMSF property investment:
- A maximum 10% capital gains tax (CGT) on the sale of the property if held for at least 12 months and potentially nil if sold in pension phase.
- Maximum of 15% tax on rental income.
- All rental income received assists in paying off the mortgage loan.
- Any expenses such as interest, council rates, insurance and maintenance may be claimed as tax deductions by the SMSF, which potentially reduces the tax liability of the SMSF
This is a relatively painless exercise if the entire process is overseen by the right person. There are many more ‘hoops’ to jump through with this borrowing arrangement in comparison to an investment property purchase outside of the super fund. It’s very much a step-by-step process which should be overseen by a qualified super fund lending expert. The expert will arrange and co-ordinate the loan approval, accompanying legal structure and liaise with various third parties, ie an accountant, solicitor, etc.
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It’s very common for SMSF settlements to settle past their due date with interest penalties applied. The key is to have one person responsible for ensuring the entire end-to-end process is managed correctly, resulting in a smooth transaction. I’d strongly suggest that anyone interested in purchasing a property through a SMSF should instigate pre-approval proceedings and speak with a specialist. Assessment turnaround times with the lenders can sometimes peak at between two and three weeks, with high volumes currently being experienced by lenders.
The Superannuation Industry Supervision (SIS) Act states that a SMSF is permitted to have a maximum of four members; therefore a ‘joint venture’ with your husband, brother and sister is allowed. All current individual super funds would ‘roll-over’ their assets to a newly created SMSF. The new SMSF would fund the initial purchase deposit and residual funds required at settlement. The SMSF would also receive rents paid (taxed at a maximum 15%), as well as making the required loan repayments.
A collective combined salary earning of $300,000 pa certainly places you in a strong position to purchase an investment property through a SMSF, bearing in mind there is typically a minimum 30% deposit required plus transfer costs. Without knowing what the level of your collective super fund assets is, I can’t estimate what the maximum purchase price is likely to be. There are also other factors to take into account such as the age of the fund members and the liquidity of the super fund post-property settlement.
Answer supplied by Vic Bulfone, SMSF Lending (www.smsflending.com)
