Until Late September 2007 Self Managed Superannuation Funds (SMSFs) could not borrow to invest into direct property. Now the law has changed and SMSF’s can borrow via an “Installment Warrant”.
Why buy investment property in Super?
- You can use your existing superannuation assets as a deposit. You can add external assets to you SMSF to increase existing assets if required.
- Your compulsory superannuation contributions can be used to service the debt, thereby maximizing your cash flow
- Capital Gains Tax can be minimised or even eliminated.
- There is a maximum of 15% tax on rental income
- The interest costs are tax deduction (via “salary sacrifice”) for principal loan repayments (which you cannot normally do).
- You choose the property you want.
- You can use business real property for personal use. Any other investment property, such as a holiday home you cannot use for personal use.
- The loan to your SMSF can come from you, a related party, bank or institution.
- Superannuation contribution cap limits can be overcome through gearing
Too see this in action, read through our first case study here.
What are the risks and considerations?
- Usual risks associated with property investment and gearing
- If you are borrowing from a bank, terms may be more restrictive under an installment warrant
- Access to income and capital within superannuation prior to meeting a condition of release
- Other than business real property you cannot use the investment for personal use
- Legislative changes
For the savvy property investor, these relatively recent changes provide an opportunity by granting them access to capital to diversify their super into direct property in a tax effective way. However, as with everything there are a few simple rules and considerations you need to be aware of.
