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Self-managed super
Buying property in your DIY fund
Damien Palmer - August 27, 2007
 Hurrah! The recent rule changes have finally opened most people’s eyes to the obvious advantages of super. Because advantageous it certainly is.
What’s really interesting, though, is no one is focussing on the equally obvious issue:
Planning
Planning to get maximum funds into super. Planning to take advantage of the taxation regime. Planning to beat the transition dates.
The kind of planning that a good super outcome needs is fairly easy. It’s just that the plan takes time to eventuate – and that’s where we all fall down! However, a failure to plan will mean most people won’t create the wealth in super they need to fund a happy retirement.
The government has been generous with taxation. When you retire after 60, the income you receive from your super will be completely tax free, just as the fund itself will be tax free. But… (there’s always a but!). The catch is getting your money into super is now much more difficult.
No can do
You can’t just dump unlimited amounts of cash into your fund anymore. Once the transitional timeframe is over in 2012, the maximum you will be able to contribute into super per annum from salary will be $50,000. So you need to start planning now!
If you have over ten years in the work force to go, you may be thinking about assets with some gearing, but without borrowing. You might consider the following ‘old’ strategy. It reduces your tax by personal negative gearing, and lets your super invest into direct property, even though you do not have enough money in super to buy the property outright in the fund.
It’s a great strategy for a DIY Super Fund. And, even better, it takes advantage of distressed and depressed prices in down cycles. Buy in gloom, as Warren Buffet says, and anyone who pays more tax than they should is a fool, said Kerry Packer.
A great strategy
The idea is this: the super fund combines with funds raised by individuals (perhaps by borrowing against the house) and pooling the resulting funds in an ungeared unit trust. If the pooled funds equal $500,000 for example, then the unit trust could consist of 500,000 units held in proportion according to the contribution of both parties. (ie If Joe has contributed $280,000 of the funds, his units would equal 280,000, the Super Fund’s share would be 220,000 units.) The property is bought in the name of the unit trust free of any mortgage.
As the super fund’s cash position grows (via contributions or income earned) it can purchase more units off the other party in the strategy (ie Joe). The beautiful part of the strategy is that the super fund is funded by ongoing contributions taxed at just 15%. For investors on marginal tax rates of 43.5% and 48.5% and salary sacrificing into super this is a very tax effective way to increase investment in direct property.
The biggest advantage of all
Better yet (and this is the big advantage), if the property market is in a downturn transfers won’t attract CGT (there may even be a capital ‘loss’ to declare in the individual’s name). In other words, you win when property (and your investment goes up), you win when values go down (you transfer more units to the super fund in a highly tax-effective manner). So if you think the property market is in a down cycle at the moment, then NOW is a great time to buy. You can then transfer units over the next year or so of the down cycle.
Over time the super fund can take up all the units in the unit trust, although it doesn’t have to. While investors continue contributing, the super fund’s earnings from its share of the rental income are taxed at just 15%.
Tax exempt
And best of all, when the super fund begins paying pensions it becomes a tax exempt entity. Rental income received by the super fund is tax free and it can sell the property free of capital gains tax.
The opportunities are generous for the individual investor too. Should the interest charges on the borrowings plus depreciation of the building, rates and other costs exceed rental income a loss is created. This loss can be offset against the investor’s earnings from all other sources.
If you buy well, rent and administer well, your cash flow may well be neutral, yet you have established an growing, tax-effective, asset!
Watch out!
Caution. Don’t try this at home! The concept is relatively straight forward, but putting it into practice is a job for the professionals - you really want all your ducks lined up correctly here. The strategy requires solid expertise in superannuation administration, regulation and compliance.
A final word of warning. While exceptions apply under superannuation legislation to what is termed “business real property,” having your super fund buy a residential property from or rent it to a fund member or relative or any related party is strictly forbidden. It’s simple, do the right thing by the tax office, have everything properly administered and it is possible to take advantage of all the Super opportunities there are in property. Who knows, you may find yourself in the happy circumstance of a happy and fulfilling retirement living off the tax effective results of good property investments that have been established with years of tax effective contributions.
Damien Palmer is the principal of Super Outsource, and prior to this was a superannuation expert at Deloitte Touche Tohmatsu, Ernst & Young and AM Corporation.
More articles from this week's newsletter:
Markets: Trouble in China has investors guessing
Self-managed super: Old strategies are now even better
Sustainable investing: Climate change and consumers: hot air or real deal?
Fundamental analysis: Chief ratios for stock hunters - part 2
Resident Trader: Trading CFDs in a gapping market
Smart Investing: Experience tunes in to the market blues
Analyst report: Retail in a tailspin?
US markets: Long valuation waves and market fear
Sub-prime: Sub-prime what?
Ask the expert: Uncovering the average forex trader
Stock of the week: Mincor shares suffer from nickel freefall
CFDs: Pyramiding provides windfall to CFD traders
CompareShares Reader: Cloud gazing or tea leaves?
Whatever your views, you can discuss this article - or any of Damien's articles - on our message board Your 2 Cents. |
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