Property is well worth considering as an investment in a self managed superannuation fund (SMSF), however did you know superannuation laws only allow funds to be invested in certain types of property and in certain ways? Richard Sheppard reports.
Last month, Mr Sheppard discussed how investing in property via super could significantly out perform traditional superannuation funds. Even with an extremely conservative capital growth rate of five per cent, property in super could provide a total end balance of around 36 per cent better than standard superannuation funds within 20 years (based on historical performance of super funds). This is due to the leveraged effect of borrowing.
SMSF versus personal investment
Undoubtedly it is different and more involved to invest in property using your SMSF, but considering the possibility of such significantly increased returns, it is well worth taking into account. The main differences between buying property in super versus your personal name are:
1. Larger deposit.
For superannuation, the minimum deposit for residential property is 20 per cent and for commerical property is 35 per cent. However if you don’t have enough money in super, you may be able to transfer or lend funds from your personal assets or property.
2. Lower tax.
Any profit made from the property, such as capital gains or when the property becomes positively geared, is usually taxed at a much lower rate.
3. Cannot negatively gear against personal income.
If the property is negatively geared, you cannot directly transfer the loss to your personal income, however there are some methods to help offset this.
4. Cannot borrow against equity growth.
The laws prevent you from borrowing against increased equity, such as if the property increases in value from capital growth, renovation or paying down the loan. If you want to use any increase in equity, you must first sell the property.
5. No development allowed.
In SMSFs, if there is any debt whatsoever, you cannot fundamentally change the structure of the building or land. While you may be able to repair and renew, you cannot do things like adding a level or room to the property or sub-divide the land.
6. Trust structure required.
As you are not buying the property in your personal name, but in the name of a superannuation fund, it needs to be established via a trust structure. This is easier than it may sound and many financial planners and accountants are very adept at setting them up. Just try to ensure they are experienced and skilled in the area.
What types of property can I invest in with my super?
The super laws and the differences noted earlier generally mean you are limited to buying residential, industrial and commercial property, including:
- Established property
- New property
- Off-the-plan property
This includes units, townhouses and houses. If you are considering off-the-plan purchases be very careful, as the risks can be quite significant, particularly if you don’t know how, or are not in a position to manage the risks well.
The general rule is the property needs to be income-producing, so you cannot buy things such as vacant land. Always check with your advisor for any specific requirements. Bear in mind this information is very general in nature and does not take into account an individual’s personal situation. You should always seek professional advice for all types of investment. Look out for next month’s article on why research is still one of the most important aspects to buying well.
Richard Sheppard is the Director of InSynergy Property Wealth Solutions. inSynergy provides professional property investment education, advice and mortgage broking services to help you get better returns with lower risk from property.