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Superannuation funds can now borrow money to purchase real estate. An investor can have just as much choice and control over investment property whilst using superannuation funds as they would by investing outside superannuation.

Many Australians have significant money invested in superannuation, and more and more are establishing their own SMSF. Many people would like to be able to include leveraged real estate in their superannuation investment portfolio.

Until recently, this has not been possible because of restrictions on superannuation funds borrowing and charging their assets. The Superannuation Industry Supervision Act (SIS ACT) was amended in September 2007 to allow Super Funds to borrow and charge their assets so long as a special structure is used.

SMSFs may choose to gear their real estate investments in order to diversify risk, increase the yield on the investment, and because many funds do not have sufficient money to purchase real estate outright.

It opens up some exciting and tax efficient avenues towards maximising your retirement income. You should certainly consider this option if you:

• Are ten years or more from retirement
• Are in stable employment and therefore in a position to make regular contributions to your super fund
• Have more than $150,000 in your fund

BENEFITS OF USING YOUR SMSF TO BUY PROPERTY

There are several distinct benefits associated with buying property through your SMSF. They include the following:

‘in-super’ transactions are subject to a much more favourable tax regime than ‘ordinary’ investments. Your after-tax returns are therefore likely to be much better. For example:

• Rental income from property in a SMSF will be taxed at 15%, compared with the rates of up to 45% that a ‘regular’ investor could be paying.
• Once you start using the SMSF to provide your pension, rental income from the property will be tax free.
• The costs incurred in purchasing and managing the property (interest, depreciation, rates etc.) could very well produce a ‘negative’ income that you can offset against other income to reduce your tax bill even further.

Properties that are held inside your SMSF and sold after your retirement are exempt from Capital Gains Tax (if current legislation is still in place by that time).

Assets held in a SMSF will, under normal circumstances, be protected against general debt recovery (this obviously does not apply in the case of the loan with which the asset was purchased) and bankruptcy proceedings.

The fact that you can transfer commercial property that you already own into the SMSF allows you to ‘unlock’ cash to invest in your business or in other assets. You can even use the funds to re-contribute to your SMSF (subject to individual contribution limits of course).

SMSF PROPERTY CASE STUDY

The following case study outlines an example of how you can use your superannuation fund to purchase a property.

Geoff and Sally are both in their forties and keen investors who love property. They have one residential investment property as well as their home. They would like to buy another property, but they do not have available equity at the moment and their bank won’t lend them more money. They are keen to purchase soon as they feel there will be some good opportunities to buy at very reasonable prices and are confident that over time property prices will continue to grow.

Speaking with their adviser, he suggests that they look at purchasing another property in their super fund. They have an existing self managed super fund which has investments and cash of around $300,000. They are employed and their super contributions on their salaries go into this fund. Of the total investments, $100,000 is in shares which they don’t want to sell at the moment as the prices have dropped significantly and they would like to continue to hold them. This leaves them $200,000 to put towards a property along with a loan for up to 70% of the value of the property.

Geoff and Sally are excited and find a property to buy for $500,000 which they can easily afford through their super fund. They borrow $350,000 and contribute $150,000 from the cash in their super fund. The rent from the property and other income in the fund covers the loan payments. Geoff and Sally have added to their property portfolio without having to use equity in their existing portfolio or contribute any cash from outside the super.

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