For many people, their superannuation just sits idly in a fund until the years tick by and they near retirement, then they suddenly start paying attention to their money and wish they had done something sooner. But others want to take control of their future and make real money in preparation for their retirement. How? By setting up a Self-Managed Super Fund (SMSF) and investing their super in property.
You can use your super to invest in a number of different assets, property being one of them. And thanks to some key legislation amendments made in 2007, your fund can now borrow money to invest, which means it has an even greater ability to make you money.
An SMSF essentially acts in the same way as a regular super fund (i.e. investing your employer contributions and handing over the money when you retire) but the difference with an SMSF is that you can choose where and when to invest, as long as you follow a few key rules.
What are the benefits?
- You have greater control over your super.
- You can benefit from some great tax concessions -- e.g. during the "accumulation phase" (while you're still working and building your super) your fund pays a maximum 15 per cent tax on the property's rental income; and when you sell the property in the "pension phase" (when you retire) you're not required to pay any Capital Gains Tax at all.
- The property isn't held in your name so you're offered a level of protection and the lender's recourse is limited to the asset only.
What are the drawbacks?
- This is a very complicated area of property investing so you really need to know what you're doing and have the support of financial professionals you trust.
- This area is heavily regulated, meaning that you need to not only be aware of the tax rules, but also superannuation regulations and the nature of the property industry. There are serious penalties for any breaches of laws.
- There are a number of key rules you need to follow (e.g. a residential property must be bought from an arm's length vendor and SMSF trustees can't occupy the property until after their retirement and upon transfer of the title from the fund into their own name).
How can I buy property through my super?
- Establish your SMSF and appoint your trustees. Register your fund with the ATO, file for an ABN, TFN and GST (if the fund's annual turnover will be more than $75,000), and open a dedicated bank account.
- Find a suitable property that adheres to the conditions noted above.
- Arrange finance, secure loan approval and reach settlement. The property trustee will now hold the legal title to the property, while the fund will hold the beneficial title.
- The fund then acts as the property owner and manages the investment as normal. It pays all ongoing costs, like maintenance, rates and loan interest. Your super contributions also go into the fund, which help to pay out the loan.
- When the SMSF has made its final repayment and the loan has been repaid in full, the legal title can be transferred from the trustee to the fund.
Of course this area is very complex and the above article offers a simple overview; the laws and guidelines may have also changed since the publication date. Always consult a qualified, trusted professional.