1. Concessional tax on rental income
Where you hold an investment property in your own name, tax will broadly be payable based on your personal rate of tax, which could be as high as 46.5%. Similarly, if you were to hold an investment property through a company, the tax rate is 30%.

Due to the concessional tax rate that applies to superannuation investment earnings, rent received by your SMSF will be taxed at a maximum rate of 15%. And, because certain expenses related to the ownership of the property such as land rates, property maintenance etc will generally be tax deductible to the fund – the effective tax rate may come down even further.

2. Concessional tax on future capital gains
Special superannuation tax rates also apply to any capital gain made as a result of an increase in the property’s value. As a result, depending on when you decide to sell the property, any capital gain your fund makes on the sale of the property may be completely tax-free.

To summarise:

If you sell the property while still in the “accumulation” phase, the fund will generally pay CGT of up to 10% on any growth in the property value assuming that the property has been owned for at least 12 months).
On the other hand, if you decide to sell the property after you have transferred it into the “pension” phase, within your SMSF, any capital gain will be exempt from tax altogether!

3. Increased superannuation opportunities
In addition to the above, where the property owned by your SMSF is the property from which you run your own business, superannuation rules require your business to pay a commercial rate of rent to the fund – providing you with a way to accelerate your superannuation savings.

The rent that your business pays into your SMSF will be tax deductible to your business, but more importantly for superannuation purposes, it will not be treated as a superannuation contribution.

Because the tax benefits available on superannuation contributions are currently limited to $25,000 a year, or $50,000 if you are aged 50 and over1 , the ability to make tax deductible rent payments into your superannuation fund – without this rent counting towards these limits – enables you to build your retirement benefits quicker and tax efficiently.

4. Other benefits
Depending on your personal circumstances, there could also be other benefits from holding property within your SMSF.

For example, superannuation assets are generally protected from creditors in bankruptcy situations. So, in the unfortunate event that you fall on difficult times, holding property within your SMSF may provide you with some added protection.

Further, if you are a small business owner, superannuation assets are not included when determining your eligibility for the generous small business CGT concessions that apply when you sell your business or retire. By planning ahead, you can ensure that you better qualify for these concessions.

What is an SMSF?

A self managed super fund (SMSF) is a superannuation fund in which members are also trustees. It is managed by members, giving them greater control and choice over how to invest their funds.

Choosing to invest in a property through an SMSF means that all trustees within the fund are stakeholders of the investment.

People may decide to invest in property through their SMSF if they have a large sum of money in the fund to finance the property in comparison to their income stream, and also to reap benefits including lower tax rates. Tax on a property purchased through an SMSF is measured at 15%, which is much lower than most personal tax rates. If the property is sold during the accumulation phase of superannuation, the capital gains tax is reduced and if it is sold at pension phase, it is tax free.

Things to consider when choosing an investment property through your SMSF include growth potential of the property, rental yields and longevity. Investing through your SMSF might seem like the right option, however there are a few requirements and limitations to this form of investment.

• Your SMSF must have enough money for the investment. Like with any investment, you need to have enough money to finance it. In most cases, an SMSF will require a 30% deposit on a property investment, so it’s important to ensure that your fund can finance the deposit as well as mortgage repayments. It’s also wise to maintain a buffer amount in your fund to account for potential market changes and tenant vacancy. Lenders will only consider your super contributions and rental income when deciding whether you are eligible for the loan, so potential rental yields as well as vacancy risk should be factored into your decision. Additionally, it is best to diversify your investment. In addition to investing in a property you may want to also invest a smaller portion in shares. This looks much more favourable should your SMSF be audited. This means you need to have additional funds outside
• The investment must comply with the ‘sole purpose test’. Investing through an SMSF must be for the sole purpose of gaining income for retirement. If the property is used to benefit trustees in the short term, it may be breaching ATO requirements. For example, after purchasing a property through your SMSF, you, your family members and any trustees of the fund are unable to live in it.
• The investment must be at ‘arm’s length’. The fund’s assets need to be bought and sold at market value and interest free loans cannot be made through the fund to family members and friends. If you have purchased a commercial property and intend to use it for your own business, rent will need to be paid at market price.
• The nature of the property cannot be changed. Maintenance and repairs are of course an exception, however renovations and developments are prohibited on properties purchased through an SMSF.

Prior to investing through an SMSF, it’s important to seek professional advice from a financial advisor in order to understand all requirements and limitations. A financial advisor will help guide you to make the right decision.

If you think investing through an SMSF might be the right option for you, talk to CPS Finance today.

There are significant advantages to having a property in an SMSF for example tax effectiveness: your super fund will be taxed at 15 per cent which is considerably lower than most people’s personal tax rates.

However, there are a few things to bear in mind if you plan on setting up an SMSF specifically to buy property, whether it’s residential or commercial. You have to ensure it supports your overall investment strategy and avoids unnecessary risk. 

Ultimately, the test of whether you should buy a property with your SMSF comes down to making a rational investment decision based on facts and advice.

Read the full article on realestate.com.au

Interested in discussing your investment option Contact CPS Property today.