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BUYING AN INVESTMENT PROPERTY WITH SUPERANNUATION

04-03-2009 15:17:50

In 2007 there were Amendments to the SIS Act. These amendments provide an exception to the superannuation borrowing restriction. This effectively allows a Super fund to borrow for the purposes of property purchase – subject to strict conditions. This means we can implement gearing via a Debt Installment Trust structure. A super fund trustee may borrow to acquire a beneficial interest in an asset that is held on trust for it. Due to the strict legislative requirements around this exception, it’s very important to get the structure right. This new legislation has opened up investment opportunities. Installment Warrant legislation effectively allows limited borrowing to purchase a variety of assets: * Shares * Property *Art and Commodities Why Super? Super is THE MOST tax effective savings vehicle. It keeps our savings and assets safe from creditors. We already know that it provides a long term savings for retirement and tax free income after age 60. You pay only 15% tax on contributions and investment returns – as opposed to your marginal tax rate of up to 46.5% (including the Medicare levy) less tax means more of your own money is available to invest. Capital Gains Tax is typically lower inside super. And if you transition your super to pension phase, no CGT may be payable. Capital gains tax is a maximum of 15% and potentially 0%. Current legislation limits contributions, but by borrowing, the super fund can increase the value of assets it holds. All future growth will be within the super environment. Property in Super: Clients have wanted investment property in their super for some time. Super has been able to invest in property all along, but previously you needed to pay Cash for the total value. The new legislation allows for the super fund to borrow to assist with the purchase of an investment property. Structuring the Opportunity: This opportunity is not available to personal retail or industry super funds. It requires you to have a Self Managed Super Fund (SMSF). It also requires you to have qualified advice. There are legislative restrictions about the purchase of the property and your use of it which your can discuss with Andrew Bird in person. How it Works: The first step is to identify a potential investment property purchase. Then your Adviser will set up a Self Managed Super Fund and Debt Installment Trust for you. You Super fund contributes your deposit on the property from your super fund balance. The bank provides the balance of funding with a loan. You rent out your property and the rent is paid to your SMSF.Your SMSF then makes the Loan payments. What are the benefits? There are many benefits to this strategy. It allows you to invest in assets you otherwise could not have afforded. It allows you to diversify your portfolio with a larger balance. Interest can be deductible. So interest will offset some of the tax paid on contributions and fund income. Subject to anti-avoidance rules, acquiring and accumulating within super can protect those assets from commercial risks. Personal Gearing enables personal tax deductions, but gains are also locked to and taxed at personal rates. Growth and income within the superannuation environment is taxed at lower or possibly Zero rates, and is protected from Bankruptcy and Law Suits. Reduced Capital Gains Tax rates of 10% (>12 months) and 0% in Pension phase. For more information contact Andrew Bird on 07 3219 1877 or email him at info@sumfinstrat.com.au