Purchasing Property: Self-Managed Superannuation Funds or a Mortgage in Your Name?

Property investment has long been a passion of many Australians. Yet many people are not aware that they can fund their investment in property through their self-managed superannuation funds (“SMSFs”). Through an SMSF, super monies can be used as the deposit for any type of property investment. In this article, we will compare the advantages of SMSF over purchasing investment property in your own name, looking at issues relating to financing, tax, negative gearing, and deposits.

Financing, Ongoing Costs, and Deposits

Financing costs for SMSFs are significantly higher than those for a typical investment property loan. Loan-to-value-ratio (“LVRs”) are also higher for SMSFs – around 72% – 75% for a residential dwelling and 65% for a commercial property, leading to higher deposit requirements for those seeking to purchase through SMSFs. Establishment and legal fees charged by banks will tend to be higher for SMSFs as well, though if you purchase more properties through the SMSF, these higher fees and set up costs will be offset. Ongoing costs relating to record keeping and compliance will tend to be higher for SMSFs.

However, higher financing and ongoing costs are offset by the fact that most people will tend to have more in their super accounts than their saving accounts. Furthermore, the larger your deposit, the more likely that your will be able to purchase a property that will yield a positive cash flow, and the sooner you can get started on purchasing a second, or third property. Keep in mind that there are also ways to pool super funds into a single SMSF, so you can enlist the support of parents or partners to boost your property investment funds.

Taxation

Over the long term, SMSF purchased investment property hold a distinct tax advantage over common property loans. Negative gearing means you can offset losses from your negatively geared property against your tax liabilities with a traditional property loan structure in your name. Under a SMSF, you can salary sacrifice to cover your property loan repayments and any other expenses related to the property.

Because you don’t pay income tax on the salary sacrificed, you get to keep the difference rather than paying it to the ATO week by week and obtaining the refunded difference at the end of the financial year. When you sell the property, you would tend to make bigger tax savings through the SMSF compared to the situation in which you held the property under your own name. Additionally, all income and capital gains on assets used to support your pension, including the property, is tax exempt once you reach retirement age and start drawing a pension.

Access to Funds

When it comes to access to funds, owning a property in your own name allows greater flexibility than SMSFs. Any money contributed to superannuation funds must remain there under the age of retirement – age 55 – whereas you can access any profit you make from selling property if you bought it in your own name. If you intend on making long term investments for retirement, then locking your funds away would not be an issue when balanced out by the ability to draw money tax free from SMSFs when you hit retirement age.

Asset Protection and Transfers

SMSFs afford greater protection to assets since it is a separate legal entity. If you are successfully sued by another party, the assets and property held by your SMSF cannot be used to repay any debt or rulings against you.

In general, SMSFs are great for long-term investments when considered in the context of financing, tax payments, and asset protection. While generalisations can be made, obtaining individualised advice for your specific circumstances will help you decide whether a SMSF property purchase is right for you.

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