A super fund is likely to be the largest single investment an individual holds toward their retirement. However, with property now considered one of the major asset classes, and capable of producing exceptional panegative gearingssive income, a major downside is that property cannot be held in an ordinary super fund, but has to be invested in via an SMSF. For the person savings toward retirement, investing in an SMSF and holding property offers a number of advantages.
Benefits upon investing
- The SMSF investor benefits from the same contribution regime as ordinary supers. An employer must pay minimum of 9.25% of the employee’s salary into a super fund, and this forms part of the employee’s concessional contributions.
- Concessional contributions, though limited to $25,000 (for under 60’s) are made direct from salary before tax is paid (the self-employed are able to claim the tax back) and then taxed at 15%. For those taxed at 46.5%, the 15% tax payable on concessional contributions represents an effective extra $31.50 of take home earnings.
- Depending on the investment property, the SMSF is able to claim depreciations on the property – reducing the actual tax rate below 15%. Called “negative gearing”, the tax rate can even be reduced down to 0% (although this is uncommon) – depending on the circumstances.
Benefits of holding property within an SMSF
Apart from the exceptional growth and income prospects offered by an investment in property, holding investment property within an SMSF provides further substantial benefits.
- Any income and interest within an SMSF is taxed at just 15%, whereas if held outside a super it would be taxed at the individual’s highest tax rate.
- This means that when the property moves from being negatively-geared to positively-geared (when income exceeds costs), the income produced will be taxed at only 15%.
- Within a super there is a tax break upon any capital gains. If the asset is held for more than 12 months, and capital gains made will be charged tax at just 10%.
At preservation age and beyond
- The SMSF can be converted to pension phase when the investor reaches their preservation age (depending upon date of birth, this will be between 55 and 60). When this is done, any income and capital gain made will be free of tax liability.
- At age 60, the SMSF holder is entitled to receive their super tax free.
An investor wanting to benefit from property as an asset class, investing in property directly must do so through an SMSF. With huge tax advantages upon investment, and then throughout the term of investment and finally when it is realised for retirement income, it is easy to understand why the SMSF sector is the fastest growing in the investment world, with growth of 8% in the 2011/ 12 and 478,000 SMSFs with a combined value of $439 billion (statistics from the Tax Office).
To take full advantage of these benefits, an investor should always seek the advice of an experienced and qualified professional. Here at Super Finance, our advisers cover the full gambit of SMSF investments, from financial advice, through mortgages and insurance, on to accountancy services to help clients benefit from all the advantages of SMSF investment.