How to buy property using your super
A growing number of investors are turning to self-managed superannuation funds to take control of their future nest eggs.
According to the Australian Taxation Office, self-managed super funds (SMSFs) account for almost $439 million of the $1.3 trillion in Australian super funds, with more than 478,000 funds in operation at June 2012 and the number of funds growing at more than 6% per annum.
Many Australian investors are turning to bricks and mortar due to its relative stability when compared with other asset classes. In fact, of the 19 superannuation asset categories, residential property ranks in the top seven and is an increasingly popular investment option for those aged 45 to 64 with $200,000 or more in their SMSF.
Recently revised super rules mean it’s even easier for Australians to invest in property using their superannuation, with SMSFs providing improved taxation rates for voluntary contributions, asset protection in the instance that the fund holder declares bankruptcy, and of course no capital gains tax and/or tax free income once the trustee has reached the pension phase.
While an SMSF can be an effective structure to build financial wealth for your retirement, the process is not without risks. Not only must the fund be suitably structured but it’s also critical to select assets that will provide positive long-term financial outcomes. And when it comes to real estate assets, the fact is, not all property performs the same, which isn’t always obvious to investors from the outset.
To assess whether a property is suitable for investment using a SMSF, consider the following rules.
1. Size matters
There are lending restrictions on the minimum size requirement of properties purchased with self-managed super funds, limiting purchases to properties of a minimum of 50m2 – depending upon the size of the deposit and the loan to value ratio (LVR). Ensure the property meets the minimum size requirements before you make a purchase.
2. Renovation restrictions
The condition of the property is extremely important. Rules disallow capital improvements on property purchased with a SMSF – you can only make minor renovations for maintenance reasons.
Therefore it’s critical to ensure a property is in tenantable condition prior to purchase.
3. Single asset limitations
SMSF properties must be a ‘single acquirable asset’. This means both the dwelling and car park must be of the same title, or the plan of subdivision must stipulate that the title is restricted. This is to prevent the separate sale of one or the other.
These days property investment is complex, offering a range of choices including established property, off the plan, high rise CBD apartments, student accommodation, serviced apartments and more – all of which are subject to individual risks and benefits. Remember, each property is different, even from one street or lot to the next.
To maximise the benefits of investing in property with super, select a property with the right profile for strong capital growth. Properties of this kind are typically underpinned by location, scarcity in the type and number of similar properties and have a track record of stable performance.
If in doubt about establishing an SMSF or selecting an investment-quality property, consult a solicitor, financial adviser or independent property adviser for professional advice.
NB: The recent Financial System Inquiry recommended that superannuation funds not be allowed to borrow. The Government has made no announcement with regard to what it plans to do and any change in rules isn’t expected to be retrospective.
Disclaimer: WBP Property Group does not hold a financial services license and therefore cannot provide financial or other advice on superannuation products. If you are considering using a self-managed superannuation fund to purchase property, consult a qualified and licensed financial adviser.