Purchasing an investment property through a self-managed superannuation fund (SMSF)
At Assure Wealth, many people seek our advice on how to invest their superannuation. We have the expertise and experience when it comes to developing a tailored investment strategy that is appropriate to each individual’s specific situation. An investment property is a significant investment, one that provides long-term growth potential with a predictable income stream – both are important features when selecting an investment for superannuation. This case study explores how you could invest in investment property using a SMSF.
Consider the following scenario:
- The Thomas’ are a busy professional couple in their 40’s that want more control over their super
- The Thomas’ earn $200,000 p.a between them
- Their super contributions are 9.5%, they will receive around $19,000 p.a in super
- Combined, they have a joint super balance of $200,000 and don’t know the exact details of how their money is currently invested
- They have a large mortgage and cannot support the cash flow required to purchase a negatively geared investment property outside of superannuation
They are frustrated with the fees and lack of control with their current super funds and decide to start their own SMSF. They want to take control of their investment choices, build wealth for the future and get their super money working for them. Here are some of the steps the Thomas’ wish to take:
- Find a Financial Planner to help them get their financial house in order and keep it that way year after year
- Take control of their super by setting up their own SMSF
- Review their investment options with a strong preference towards direct property investment as that is the asset class which they both understand and feel comfortable with.
How would the Thomas’ use their SMSF to buy an investment property?
The SMSF cannot afford to purchase a property with the current balance, however it can borrow to fund the shortfall between the super fund balance and the purchase price. This is done via a structure called a “limited recourse borrowing arrangement” (LRBA). Here are the details of the investment:
- Investment Property valuation: $500,000
- Deposit: $150,000 provided by the SMSF
- SMSF Loan: $350,000 – borrowed as part of the LRBA
- Fees: $50,000 is set aside for stamp duty, legal costs, SMSF establishment fees and to leave some cash in the SMSF to fund loan repayments whilst tenants are found.
Breakdown – outgoings and contributions in year 1
- Principal and interest loan repayments: $22,750 p.a (6.5% on a $350,000 loan)
- Rent received from tenants: $16,000 p.a (conservatively assuming 3.5% yield with 4 weeks’ vacancy p.a) taxed at 15% = $13,600
- Superannuation contributions: $19,000 p.a taxed at 15% = $16,150
Net cash flow position of the SMSF in year 1 after tax: + $9,400
Rent paid to the SMSF and super contributions more than cover the repayments on the $350,000 loan. The $9,400 p.a surplus after Principal and Interest repayments on the investment property could be used to invest in other assets such as cash, fixed interest and shares to increase diversification within the SMSF to spread the risk across multiple asset classes.
The Thomas’ SMSF now has an investment that will meet their primary goals of growth and regular income. However, owning a single asset (in this case property) does reduce the diversification of their super money.
- The Thomas’ have taken control of their super and purchased an asset that they are confident will meet their superannuation goals and objectives.
- They are now happy to make extra super contributions knowing that their superannuation contributions are paying off the mortgage on the property and growing their net wealth
- The super contributions are only taxed at 15%. Therefore, 85% of their contributions go towards building equity in their investment property.
- Consider this, once your SMSF becomes a pension account all of the rental income will be tax free. If the property is sold after the Thomas’ retire there will be no Capital Gains Tax (CGT) payable. Neither of these tax benefits would be available if the investment property was purchased outside of super.
The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Alliance Wealth Pty Ltd Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Alliance Wealth nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information. All case studies and examples are for illustrative purposes only and none of the details in these case studies should be used as an indication or prediction of future performance or results.
Assure Wealth is not a registered tax agent, and is therefore unable to provide specific tax advice. The tax consequences shown in this case study are for illustrative purposes only