Did you know that since 2007, it’s been possible to put your super to good use by buying a property? And better yet, you can even borrow money from a bank to do it.
The best part about using your super to buy a property is that when the property becomes cash-flow positive or you sell it, you will probably pay less income tax and less capital gains tax than you will in your own name, depending on your marginal rate of tax.
Your super options
Despite lots of rules, regulations and changes, the government allows people to invest in their super fund and they have lower rates of tax to incentivise savings. For example, while you are in accumulation mode (not drawing a pension), you will only pay 15 per cent earnings tax on any profits you make in your super fund. If you own an asset for 12 months or longer, you will only pay 10 per cent capital gains tax.
It gets even better because you can now borrow money to buy property inside a self-managed super fund (SMSF). This is called a limited recourse borrowing arrangement (LRBA). Of course, a SMSF is not for everyone and the Australian Taxation Office (ATO) reckons you’ll need around $200,000 in your combined super funds to start one up. But that figure is not legislated – it’s just a guide.
The ATO has two booklets that are essential reading if you are thinking about setting up an SMSF: Setting up a self-managed super fund and Running a self-managed super fund. These booklets are vital so you know the rules, regulations and restrictions.
Getting into property
Once you have educated yourself on the benefits and risks of SMSFs, you will be well placed to seek advice around how to buy $1 million in property inside your new fund. You can have up to four members in an SMSF and therefore you can pool the super assets of up to four people. Most funds have two people – married, business partners, siblings, parents and same-sex couples are all fine. Therefore you can use the super funds of up to four people to pool enough funds to buy a property.
Most banks will lend up to 80 per cent of the value of a property, so you will need at least $200,000 plus costs such as stamp duty, legal fees, transaction costs and setup costs to be able to buy a million-dollar property.
Climbing the super property ladder
I’d suggest starting smaller with perhaps a $500,000 (well-researched) property and only borrowing a maximum of 70 per cent of its value to allow you to get close to having a cash-flow-positive property. That is, where your costs are met by the rental income of the property. This reduces risk. It’s also essential to obtain property, life, total permanent disability and income protection insurance to further reduce risk.
A $500,000 property with a 30 per cent deposit requires $150,000 down (plus costs) and would likely be cash-flow positive in the current market assuming a rental of $500 per week ($26,000 p.a., assuming full tenancy) and interest of 4.8 per cent ($16,800 p.a.). Add $50,000 of super contributions ($25,000 each p.a. if under age 60) and the debt will be repaid in about six years. Properties are also likely to gain value, assuming you’ve done your research well, allowing you bring forward the purchase of the second property. You then repeat the process to get to the magic million.
If you start small, you can then maximise your concessional contributions to super ($25,000 each under age 59 or $35,000 each over age 59 at 30 June 2013) to help reduce debt. Concessional contributions include your employer super guarantee and salary-sacrifice components.
The best tip I can give you is to get advice from a licensed specialist who has plenty of experience in undertaking transactions before you take the leap. Ask your specialist how many transactions they have helped with – if it’s fewer than 10, find someone else. This strategy is generally for higher income earners who can afford to maximise their super contributions and it carries some risk, so independent expert advice is essential. Good luck in making your first super million!
The tax related information contained in this is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice or tax advice. You should seek independent professional tax advice before making any decision based on this information.