Unlocking Your Super To Buy Property

 

Unlocking Your Super To Buy Property

Unlocking Your Super To Buy Property

Century 21 Port Douglas Real Estate has always believed that residential property investors were somewhat disadvantaged by the superannuation system as we were traditionally disallowed from unlocking the equity in our super to invest into property – our favoured investment vehicle.

In late 2007 amendments were made to superannuation legislation making it possible to borrow money and buy property with super (under certain conditions).

With the nine per cent superannuation guarantee to be eventually increased to 12 per cent by 2019, more money than ever before is set to be pumped into the super accounts of individuals moving forward.
The creation of a Self Managed Super Fund (SMSF) will help individuals unlock this equity and may be suitable for those who want to have more control over their superannuation and favour property as an investment.
According to James Gerard, Partner at PSK Financial Services, an accountant usually handles the setup of the SMSF and will apply for the ABN and TFN, and create a trust deed for the super fund.

Once setup, the individual then goes to the bank to open an account in the name of the SMSF.  Once that is completed, superannuation funds need to be rolled over to the newly created SMSF.
Once the money is in the SMSF, investments can be made.

According to Mr Gerard, the key tax advantages of holding property within super are:

- Paying a zero per cent tax rate on the rental income in retirement (15 per cent tax rate prior to retirement);
- The ability to buy and sell property tax-free in retirement (up to 15 per cent capital gains tax prior to retirement).
While outright property purchases can be made from the SMSF, under the right conditions money can also be borrowed to purchase property.
A bank could lend the money to the SMSF (via a bare trust) or a member of the fund could obtain a loan from the bank using the equity in a currently owned property and then on-lend that money to the SMSF in an arm’s length transaction.
Loans for buying property in super must be ‘limited recourse’ loans, such that if the trustee defaults on the loan, the amount that can be recovered by any other party is limited to the value of the asset.  Banks are generally willing to lend up to 80 per cent of the purchase price for a property purchase inside of super.
Head of Century 21 Home Loans, Harry Bozin, said: “For people who are interested in buying property through a SMSF, it is important to sit down with a mortgage consultant to determine your borrowing capacity, based on the money currently in your fund.
“For those who are interested in purchasing a business asset, such as the commercial property they are currently leasing, subject to meeting the criteria of an ‘arm’s length transaction’ a business owner may be able to release the equity by purchasing their property within a SMSF,” continued Harry Bozin.
“Once you have worked with a real estate professional to locate a suitable property and sought advice from a mortgage consultant regarding your borrowing capacity, your mortgage consultant can then coordinate with your financial planner and accountant to secure the appropriate funding for your SMSF,” concluded Harry Bozin.
According to James Gerard, a key consideration when buying property in super is the taxation of superannuation.
“If the SMSF property is negatively geared, the tax loss is not refunded to the fund and cannot be carried forward for use in future years.

However, member contributions to a SMSF up to the tax loss amount are exempt from the usual 15 per cent contributions tax,” said Mr Gerard.
Mr Gerard notes that holding property inside of super with a loan can be a good way for higher income earners to accelerate repayments on an investment property loan in a tax effective way.


“Contributions to super are taxed at 15 per cent, while employment income is taxed at up to 46.5 per cent.  By salary sacrificing to super, a person could potentially use 85 per cent of their pre-tax income to make repayments to a loan inside of super,” said Mr Gerard.

Other tips and traps from Mr Gerard include:
- Seek advice on whether an individual trustee or corporate trustee is appropriate for your SMSF.  Banks are generally willing to lend a higher amount if the SMSF has a corporate trustee, and corporate trustees can also have longer-term estate planning benefits. Corporate trustees are however a little more expensive on an ongoing basis with accounting and ASIC fees.
- Make sure that the SMSF pays for any incidental costs during the process of purchasing a property.  This includes costs such as building/pest inspections and solicitors’ fees.
- If borrowings are used to purchase property in super, a structure known as a ‘bare trust’ must be setup.  The bare trust holds the property until the loan is repaid, at which time the property is transferred from the bare trust to the SMSF.  The bare trust may take two to four weeks to set up so make sure your accountant has arranged this well in advance of your property purchase.
- No improvements/renovations are allowed on the property but repairs are allowed.
- Neither you nor related parties such as relatives can reside in the property (however you can rent a commercial property owned by your super fund on commercial terms).

- Neither you nor related parties such as relatives can reside in the property (however you can rent a commercial property owned by your super fund on commercial terms).
- Neither you nor related parties such as relatives can reside in the property (however you can rent a commercial property owned by your super fund on commercial terms).
Purchasing property in super is an increasingly popular strategy used by SMSF trustees however there are many things to consider. Century 21 encourages all interested parties to do their research and seek professional investment advice before proceeding.
Please feel free to email James Gerrard with any SMSF questions on: james@psk.com.au

 

About Port Douglas

Port Douglas real estate - Real estate in Port Douglas is now sought after the world over. Our passion for where we live stems from Port Douglas being the only place in the world where two natural, world heritage listed sites (the Great Barrier Reef & Daintree Rainforest) exist side by side. If you would like buy or live in your own piece of paradise, please browse our real estate listings http://www.realestateportdouglas.com.au The views expressed in the Port Douglas blogs are not those of Century 21 Port Douglas Real Estate nor the Century 21 franchise.
This entry was posted in Australia, Australian Home Buyers, Australian Homes, Banks, Buy Property With Your Superannuation, Century 21, Century 21 Port Douglas, Far North Queensland, Home Loans, Home Ownership, Investors, Property, Property Investor, Property Management, Property Port Douglas, Property Tips, Queensland, SMSF - Self Managed Super Fund, Superannuation - Tips for buying Property, Tips For Vendors and tagged , , , , , , , , . Bookmark the permalink.

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