Self managed super funds (SMSFs) are becoming increasingly popular in Australia. This trend is making it possible for individuals to use their retirement savings to invest in residential property. Typically, an SMSF would contribute a deposit and then borrow the remaining required funds to purchase an SMSF property. This article explains some of the benefits of borrowing for the purpose of SMSF property investment.
1. Greater investment choice
Without borrowing most SMSFs simply aren’t large enough to afford property at all. Others may be large enough but would need to use a high proportion of their funds leaving them in a position where their investments are not sufficiently diversified.
By borrowing, more SMSFS can now afford to include property in their assets. This gives the SMSF more choice of assets and aids diversification.
2. Leveraged Investment
Borrowing to purchase property can allow SMSFs to leverage their assets for greater growth.
3. Negative gearing to reduce tax
In many cases property investment will be negatively geared. That is, after allowing for interest on borrowings, holding costs and depreciation the property makes a tax loss. This tax loss can be off-set against other taxable income of the SMSF (e.g. member contributions, interest on cash assets) to reduce the tax payable by the SMSF.
4. Capital gains tax reduction
Taxing of capital gains incurred by SMSFs is different than the rules for “outside super”. A SMSF would pay 15% on capital gains for property sold within 12 months, and effectively 10% where the property is held for over 12 months (the SMSF only needs to declare 2/3 of the capital gain which is taxed at 15%). But most importantly no capital gains tax would be payable if the property is sold when the SMSF is in pension phase. property investor
5. Direct Control and member preference
Often, people choose to establish an SMSF because they want more direct control over their superannuation investment strategy and asset choice. Property is an asset which gives the SMSF member more direct control and is therefore a natural fit with SMSFs. Many people have a preference for “bricks and mortar” assets which until recently have been out of reach for most SMSFs
6. Member investment skill
In some cases the SMSF trustee may already have significant skill in property investing which can be utilised by the SMSF. In some cases people may have invested in property “outside super” but exhausted their capacity to continue to invest and an SMSF will allow them to utilise their property investment skills to invest for their retirement “inside super”.