Using your existing superannuation to acquire property.
Many people are unaware that they can use their superannuation to acquire residential or commercial property. Whilst many don’t have enough in superannuation to do this, the laws allow you to borrow the funds, subject to banking lending ratios and your own personal circumstances.
Your existing superannuation balance could hold the key to raising a substantial deposit for the purchase, while the rest can be borrowed by your very own superannuation fund, commonly referred to as an SMSF.
The rent and your future superannuation contributions (employer or personal) can then be used to pay off your investment over time. If you use a salary sacrificing strategy, the time taken to pay off the investment can be accelerated substantially with the property being paid off in 7 to 10 years.
The benefits of using an SMSF to acquire property are compelling as outlined below:
- Tax on any rental income after expenses is only 15% rather than at your marginal tax rate subject to your income being less than $250,000 inclusive of salary sacrificed super amounts.
- The deposit and stamp duty required on the purchase are funded by your superannuation, rather than your personal savings or further borrowings on your home. That leaves your personal savings intact and in most cases your current lifestyle unchanged.
- Rather than just using the rental income to pay down the loan, your employer superannuation contributions can also go towards the loan. This means you may need to rely less (if at all) on your salary and wages to help fund the investment which leaves your lifestyle unchanged.
- By choosing to salary sacrifice more into superannuation, above and beyond your employer contributions, you can save tax personally by reducing your marginal tax rate and at the same time provide the SMSF with the ability to pay down the loan faster. A very effective approach used by the wealthy.
- The maximum tax, should you sell the property after 12 months is only 10% of the capital gain made.
- The potential tax should you sell the property in retirement or pension phase is Zero, based on current legislation.
The strategy suits someone that ticks some or all of the points below
- Is looking to take control of their superannuation
- Has a superannuation balance of at least $ 150000 plus
- Can salary sacrifice more into superannuation in an effort to reduce debt quickly.
- Has a preference for direct property, rather than shares or indirect property
- Doesn’t quite have a deposit to buy a property, but their deposit is effectively sitting in superannuation.
- Wishes to retire at some point in a beach or country residence and purchase their retirement home at today’s prices, with a view to moving in upon retirement.
The decision to use your superannuation for property should not be made lightly, and hence you need to be guided by professionals in this area.
If you have any interest in this area, please call our office for assistance. We have the necessary contacts to handle the process from start to finish.