Changes to Australian superannuation legislation property investors should know about

Prior to 2008, in order to acquire property, an SMSF had to be able to pay for it outright – a difficult thing to do for any but the largest funds.

In 2008, however, changes to superannuation legislation confirmed that Self-Managed Super Funds (SMSFs) coulduse borrowed funds to acquire property, providing greatly enhanced opportunity to diversify their investment portfolios.

Whilst there are some rules that must be followed, essentially an SMSF can borrow to invest in all types of property;residential, retail, rural,commercial property or a combination of whatever is best suited to the SMSF’s portfolio needs. The fund’s choices will depend on the preferences and circumstances of the members of the fund. For example, a mum or dad may wish to acquire a residential rental property, while a business owner may want to acquire a commercial property from which they can operate their business.

There are also numerous tax advantages provided by the superannuation system that make using an SMSF to invest attractive. Benefits include a maximum 15% tax on rental incomeand10% capital gains tax on the sale of capital assets prior to retirement. If one’s situation is well managed, tax on rental income and capital gains can drop to 0% soon after one turns 55. Additionally, business owners who acquire a commercial property and rent the premises from their own SMSF have the opportunity to‘contribute’ to their super above the concessional/non-concessional limits.As always, it is important to remember everyone’s situation is unique and therefore, to make the most of these benefits and to ensure you receive appropriate strategy and structuring recommendations, it’s important to get sound financial advice.

Using an SMSF to borrow funds for property investments can be a very powerful tool. There are, however, potential restrictions and additional costs that must be considered before undertaking such a strategy. For example, neither a fund member nor someone from their family can occupy a residential property owned by their SMSF, the tax effectiveness of negative gearing can be somewhat diminished, and there are legal and borrowing costs to be considered.

Ownership via a Self-Managed Superannuation Fund is now aviableoption when considering property acquisition. There is plenty to think about, so before deciding that this is the right strategy for you, seek the advice of a trusted financial advisor to ensure that using your SMSF is the best thing to do in your circumstances. And, of course, use the right help to buy well!

Written by Paul Kearney & Derek Ma – Kearney Group Financial Services