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Self Managed Super – A whole new ball game for property investment

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Australia's appetite for remains strong

Australia’s love affair with real estate as an investment has paid enormous dividends for investors over the decades. Real estate investment has helped many investors not only protect their wealth but also grow their wealth through much of the .

With Australia’s appetite for real estate investment remaining strong and many real estate experts expecting market conditions to remain so for the foreseeable future, financial experts are recommending investors to consider investing their superannuation funds in property rather than owning the property as individuals.

“The relaxation of borrowing rules to enable investors to into property and accumulate more exposure to the direct property market than previously afforded has opened up a whole new world for property investors.” Melbourne-based Fortrend Securities adviser, Joel Hewish says.

“There is an enormous amount of flexibility surrounding ,” Mr Hewish adds. “Before investors launch into purchasing that next , they should explore all the structuring options available to them as the tax benefits and increased flexibility available can be very significant”.

Since 2007, the government has relaxed the rules surrounding borrowing within superannuation funds, and recent announcements have provided further clarity around setting up these structures.

Key aspects of these new arrangements include:

  • The real estate investment must be purchased on trust with the holding a beneficial interest in the asset.
  • The fund must have the right but not the obligation to acquire legal ownership through payment of a final instalment.
  • The lenders recourse is limited to the underlying asset if default occurs.
  • The asset must be a newly acquired asset of the superannuation fund.

Lending in this market is increasing as lenders become more comfortable with the arrangements required under law. There is now evidence that competition from lenders is increasing and interest rate margins are starting to reduce. “Banks are gradually reducing the premiums which they first required for this type of lending structure. So long as you have advisers who know where to go, you can still get a very compelling deal”.

Most lenders to superannuation funds will tend to lend at a maximum loan to value ratio of approximately 70%, therefore if you were looking to purchase an investment property valued at $500,000, you would probably be required to produce a deposit of $150,000 from your superannuation fund with the remaining $350,000 coming from the lender.

Investors who are considering this structure should seek advice before purchasing the property as rules surrounding the transfer of assets between related parties of the superannuation fund could significantly jeopardise your longer term investment objectives and have unintended capital gains tax consequences.

How does it compare?

The graph below has been constructed using some basic assumptions and illustrates the difference in capital gains tax depending on whether you purchase inside or outside a Self Managed Super Fund . When investing in a , if you sell during a pension phase CGT is minimal. In a super accumulation phase, CGT is nearly half of what is would normally be if you had a direct ownership structure. In addition to this, loan repayments are made from your super contributions which are taxed at 15% as opposed to 38% for those who earn between $80,000 and $180,000.

Capital Gains Tax and SMSF

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Source: Fortrend Securities

Choosing the right property when investing in a SMSF is critical as it will constitute a part of your retirement nest egg – you really need to have an emphasis on risk minimisation and you need to be able to identify and source the optimum investment property.

We believe direct property is going to become common place in a standard superannuation portfolio and as such we will be providing more information on this topic moving forward.

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