Mon 05 Mar, 2018
Tax Benefits of Buying Property with Super – A Complete Guide
Commencing a self-managed superfund is becoming more and more popular among Australians looking to take control of their retirement savings. We’re all putting away at least 9.5% of our salary, but if you want more control over where your money is invested, an SMSF could be for you. Aside from giving you the freedom to invest your superfund in anything you like, there are some generous tax benefits for SMSF owners. In this guide, you’ll find out more about the tax benefits of owning an SMSF, and how you can work them to your advantage.
Buying Property with your SMSF
Being able to buy property is a common reason for commencing a self-managed superfund. Australia has seen incredible property market growth since the 2008 global financial crisis, and basically, we all want a piece of the action.
Nuts of wisdom: studies have shown that despite less young people being able to buy their first home than before the GFC, the ones that do are paying their loans down faster. All in all, we’ve recovered quite well – just look at the property market in Sydney!
The astounding growth in property values – particularly in eastern capital cities – has caught the attention of many would-be and existing SMSF owners. The potential to build wealth and diversify your asset portfolio is making self-managed superfunds almost as trendy as smoothie bowls and vegan leather!
Your superfund can buy residential property in Australia of your choosing. Whether you’re focusing on capital growth or cash flow investment strategies, residential property may be able to assist in growing your superfund for retirement.
Your superfund is also permitted to buy commercial property, and unlike residential transactions, you can run your business from these premises. So long as you lease the property from your fund as though it were a regular landlord – that is, at market value, on time and in the same contractual manner – you’re permitted. We discuss more about this in the next section.
All investments within your superfund must be arms-length investments. The ATO describes arm’s length investments as those that provide and receive returns on a normal commercial basis. They cannot have any differential or preferential treatment based on members or trustees of the superfund. They also cannot be associated with any fund member or any connected party in any way.
Nuts of wisdom: an example of breaching the arm’s length practice, would be to lease your business premises from your superfund at below market value. All transactions with your superfund must be exactly the same as if you were transacting with a regular tenant or vendor outside of your superfund.
The All-Important Tax Benefits
Okay, we promised you some juicy tax concessions, and here they are.
Generally, income tax on compliant superfunds is taxed at 15%, no matter what you earn inside or outside your superfund. So, what this means is that rental income from your investment property will only be taxed at 15%. If you owned the same investment property privately, your rental income would be taxed in accordance with the ATO’s standard income tax brackets. In short, you could be paying as much as 45% tax, depending on how much you earn.
John’s SMSF owns an investment property that he rents out for $300 per week. After relevant expense deductions of $3000, John’s annual profit of $12,600 is deducted at 15%. John pays $1890 in tax on his investment income.
Janine, John’s sister, owns a private investment property. She rents hers out for $350 per week – hers is a little fancier than John’s. It has a balcony! After relevant expenses of a similar amount to John’s – $3000 – Janine’s annual profit is $15,200. Since Janine earns $90,000 at her job as a project manager, her income will be taxed at the marginal rate of 37c per $1, meaning Janine pays $5624 on her investment income. Despite grossing more from her investment than John, Janine’s net income from her investment is only $9576, because it’s a private investment and not an SMSF investment.
Capital gains tax on private investments (outside of your superfund) are calculated based on your other earnings that financial year. If you’ve held the asset for more than 12 months, you’ll only pay duty on half of your capital gain, but this can still at up to thousands if you’re paying in one of the upper tax brackets.
In your superfund, capital gains tax is just 10%, providing you’ve held the asset within the fund for at least 12 months. Sell prior to this and you’ll pay 15%.
John and Janine from our rental example both decide to sell their investment properties after a market boom.
John bought his property for $200,000. He sells the property for $400,000, meaning he makes a capital gain of $200,000. John will pay 10% capital gains tax, making his liability $20,000.
Janine bought her property for $230,000. She sells her property for $390,000, meaning she makes a capital gain of $160,000. Because Janine has held her property for more than 12 months, Janine only pays CGT on 50% of her gain. So, her dutiable amount is now $80,000. Remember, Janine earns $90,000 at her project manager job, meaning the sale of her asset is taxed at her marginal rate of 37c per $1. Based on this, Janine’s liability is $29,600. She made a smaller capital gain than John, but paid more in capital gains tax than if her superfund had bought the property.
When you retire and commence a pension from your SMSF, your tax benefit story gets even more interesting. Once you’re in the pension phase, you’ll pay 0% capital gains tax on any sales or disposal of assets, and any rental income from your property portfolio will be tax free.
Other Tax Concessions and Exemptions
There are a couple of other ways you can reduce the taxes and duties on your SMSF:
Stamp Duty Concessions
As we mentioned earlier, if your SMSF buys a commercial property, your business is able to lease it back, so long as you pay regular market value. Your SMSF can also buy the business premises you already own from you – without the usual burden of hefty stamp duty. Your stamp duty concession varies by state, but can be reduced to zero in some areas of Australia.
Just like any other investor, your fund is entitled to deduct any expenditure that directly relates to income-producing activities. Whether that’s ongoing maintenance of your property, depreciating assets or an accountant’s fees, it can all be deducted from your taxable income.
Pitfalls to Avoid
While these tax benefits are available to everyone with an SMSF, it’s important to remember that the ATO will punish you if you don’t uphold your responsibilities as an SMSF member. As discussed earlier, all SMSF investments must be on an arm’s-length basis. If you’re found to have breached this policy, the concerned investments will be taxed at the highest marginal rate – regardless of your income.
Interested in buying property with your super?