Since superannuation become compulsory in 1992, self-managed super funds (SMSFs) have been a popular option for Australian investors. According to statistics, approximately 1,000 self-managed super funds are registered each week.
An SMSF enjoys the same tax advantages and discounts as retail, industry, and corporate funds on the market. The capacity to own direct property and have complete control over an investing strategy is a significant difference. Investing in real estate through an SMSF can be a terrific way to build long-term retirement wealth, but it is not a one-size-fits-all option for every investor.
Here’s a rundown of some of the advantages and disadvantages of using an SMSF to buy a home.
5 Advantages of Using a Self-Managed Super Fund to Purchase an Investment Property
1. The Tax-Effective
A super fund is intended to be your chosen retirement savings vehicle. As a result, the earnings in your superannuation fund are only taxed at 15%. This is a lot less than the taxes you’d have to pay if you were operating under your own name.
2. Business Advantages
You can buy a commercial property and rent it back to your own company using an SMSF arrangement (you cannot do the same with a residential property). However, you must pay the current market rental cost for the lease, but the money will go into your SMSF rather than someone else’s pocket.
3. Purchasing Power Boost
An SMSF can have up to four members, and pooling your money with the money of your SMSFs other members can provide you more purchasing power to invest with.
4. Capital Gains Tax Reduction
When a property is kept under an SMSF structure, it might provide tax benefits in terms of CGT. For example, the fund obtains a one-third discount on any capital gain it generates upon sale for assets held for more than 12 months, reducing any capital gains tax burden to a maximum of 10%.
5. Direct Control
The only type of superannuation arrangement in which you can directly own property is an SMSF. You also have direct control over your own investment strategies, investments, and overall portfolio diversification within the SMSF. Expert provides the SMSF Services includes auditing, tax return, etc.
While there are many advantages to using a self-managed super fund to purchase an investment property, there are also some drawbacks to consider before jumping in.
5 Drawbacks of Using an SMSF to Purchase an Investment Property
1. Personal Benefits Cannot Be Used
Investors must be aware that transactions conducted through an SMSF must be conducted at a distance. You can’t buy from, sell to, or rent to a related party, thus you can’t use your SMSF to buy a house for your kids to live in.
2. Diversification Has Been Reduced
Diversification refers to the concept of not putting all of your eggs in a single basket. A direct property will make up the overwhelming majority, if not all, of the underlying investment with a lower superannuation balance of less than $500,000. Investors should be informed about the added risk that comes with a highly specialized investment approach.
3. Cash Flow Shortfalls
Investors can borrow money to acquire property in an SMSF, but they can’t borrow money to build or improve the property (capital used for improvements to the asset must be used from existing superannuation savings).
Investors must ensure that their contributions and the SMSF’s cash reserves are adequate to pay any expenses.
Investing in an SMSF property can be a complicated process with serious consequences if you make a mistake. You can, however, seek professional assistance to help you manage the fund and advise you on how to negotiate the rules and restrictions.
5. Ongoing and Associated Setup Costs
Property investments made through an SMSF, especially those with an attached legal recourse borrowing arrangement (LBRA), would have greater setup fees than those made through cash purchases. When purchasing a property through an SMSF, investors must carefully evaluate the associated setup costs. Aside from the startup charges, SMSFs are required to have an annual SMSF tax return and audit completed by a competent and registered tax agent; this is an extra cost to the fund that should be considered.