Using your Superannuation to buy property

Property investment is one of the mainstays of the Australian investment environment.

It is one of those asset classes that Australians feel they can readily understand, and while not without its risks, there is a perception (which may or may not be true) that property can be a relatively safe long term investment.

A property investment can generally be defined as one where investors purchase property assets for both income and/or capital gain. There are a number of forms in which this can take, which fall under two broad categories:

Direct Property Investment using a Self-managed Super Fund

These include direct investment into residential houses, apartments, townhouses, commercial offices, factories & industrial properties, and land. One of the key advantages investors see in direct property is that it is tangible (i.e. they can see it and touch it), and that they can use their own labour to make improvements to it.

The key disadvantages are the transaction costs, it is not divisible (i.e. you cant just sell the bathroom), its relatively illiquid in that it can sometimes take a while to find a buyer if you want to sell it, and the ongoing costs of maintenance. And of course the big one for SMSFs is that properties tend to be big ticket items, where the price of a property will generally range from 6 to 7 figures, and borrowing is often required.

Indirect Property Investment by Self-managed Super Funds

These include investment into structures such as property syndicates, listed property trusts, unlisted property trusts, and managed funds that invest into any of the above. The key advantage of these are the fact that you are going into a pooled structure, such that you are getting exposure to the underlying properties, but are not having to pay for the property all yourself. This is very convenient for most investors who want a diversified portfolio of assets, plus they tend to be more divisible and liquid.

The downside (although some see it as an upside) is that these tend to be managed schemes, where you don't have the kind of direct control over the underlying properties that a direct investor has, and there will be fees involved in paying for the structure and management of the properties.

Investing in property in your SMSF

One of the advantages of self managed super funds (SMSFs) is that you can invest directly in residential property through your super. Owning a residential investment property within your SMSF can be significantly more tax effective than investing in a property in your personal name. Westpac and CBA have prepared brochures on purchasing property using your SMSF. Westpac's brochures include: residential, commercial and rural. CBA's brochure is combined and includes residential, commercial and rural (5mb download).

Tax advantages of investing through your SMSF

Firstly, the maximum rate of tax your SMSF will pay on rental income is 15%. And if your SMSF is in the pension phase, this rate drops to 0%. This compares favourably with personally held property where rental income is taxed at your marginal tax rate, which in some cases can be as high as 46.5% (including Medicare levy).

Another advantage is that if your SMSF holds the property for more than 12 months, any capital gain made on the sale of the investment property will be taxed at a maximum rate of 10%, or again, 0% if the SMSF is in pension phase.

Gearing into property through your SMSF

Due to the generally high price of purchasing a residential property that has the potential to provide good long term returns and capital growth, it may be appropriate to borrow to purchase a property within your SMSF. Borrowing to invest in property can help your SMSF maintain an appropriate level of diversification within your fund.

Buy your next new investment property and take advantage of the Boost Bonus!

From August 1st 2011 till the end of January 2012, eligible property buyers will receive a cheque for $10,000 from the State Government for each and every new property you buy - there's no limit!

So, now is an opportune time to buy Queensland property and boost your super portfolio, your investment portfolio or to significantly reduce the mortgage on your home.

We've entered into an arrangement with a prominent Queensland builder to make available a number of specially designed SMSF-ready homes for our clients to take advantage of the bonuses that are being offered by the Qld state government.

Self-managed super fund 'ready' - brand new homes that meet SMSF requirements.

How to find out more

Robert Kirk Private Wealth Management
Phone: +61 7 3666 0126
Fax: +61 7 3666 0098
Email: info@kirkwealth.com.au