Self managed superannuation funds (SMSFs) represent one of Australia’s fastest growing industries as more and more people take charge of their own retirement, rather than leave their future in the hands of a fund manager that they will never meet.
It’s understandable, because no one is going to take as much care of your future comfort and well being as you. And, to be honest, a lot of regular super funds have not exactly been putting in champion performances over the last five years.
One of the more popular assets classes for SMSF trustees is investment property. Originally, you used to have to be able to buy a property outright with the money in your super, but a few years back, the law changed to allow SMSFs to borrow money to invest in property.
Using super for property can be a way of leveraging into an asset that will earn significant value growth and a handy extra rental income; not only throughout the remainder of your working life, but during your retirement also.
Super is taxed at a lower rate than normal investments, with contributions sacrificing just 15 per cent. It is also exempt from capital gains tax, as you cannot access those gains until you are older than 60 and into a tax fee environment.
It sounds like the perfect plan, but SMSFs can be quite complex and their investments are subject to a number of restrictions.
Just like any other form of super, you can’t access the equity, or any rental income, until retirement. That’s a simple one.
However, If you do need to borrow money within the super to purchase the property, it is a far cry from how you borrow to buy your own home. Because the SMSF must borrow the money, only the SMSF can pay it off. This means the rental income and 9.25 per cent per cent of your salary alone must be enough to make the repayments.
Most lenders will require a deposit larger than the standard 20 per cent applied to non-super purchases and, even though your super fund is borrowing the money, you will still be personally responsible. This one is a big deterrent for a lot of people. It means that a $400,000 loan taken out by your SMSF will mean a $400,000 reduction of your own borrowing power.
SMSF properties are also unsuitable for hands-on investors that like to renovate or may need to use the property. In most cases, the property can’t be renovated, only repaired; and you can’t live in the property, or lease it to family members, until you turn 60.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au.
Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing.
His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au.