There are several distinct benefits associated with buying property through your SMSF. They include the following:
- The first benefit associated with this type of transaction is perhaps also the most significant. It is the fact that ‘in-super’ transactions are subject to a much more favourable tax regime. Your after tax returns are therefore likely to be much better. For example:
1. Rental income from property in a SMSF will be taxed at 15%, compared with rates up to 45% that a regular investor could be paying.
2. Once you start to use your SMSF to provide your pension, rental income from the property will be tax free.
3. The cost incurred in purchasing and managing the property (interest, depreciation, rates, insurance etc) could very well produce a negative income that you can offset against other income to reduce your tax even further.
- It is always a good idea not to have all your eggs in one basket. Buying property is an excellent way to reduce the volatility and overall risk on your retirement portfolio.
- Gearing (where you use borrowed funds to gain control over an appreciating asset) is one of the most effective long term wealth builders available. The fact the your SMSF can now borrow to buy property enables you to make use of this time honoured strategy to increase your wealth without affecting your cash flow.
- The fact that properties are held inside your SMSF means that you protect yourself from the impact of Capital Gains Tax (CGT) until retirement, at which time your gains will be tax free (if current legislation is still in force).
- Assets held in a SMSF will, under normal circumstances, be protected against general debt recovery (this does not apply in the case of the loan with which the asset was purchased) and bankruptcy proceedings.
- The fact that you can transfer commercial property that you already own into your SMSF allows you to unlock cash to invest in your business or in other assets. You can even use the funds to re-contribute to your SMSF (subject to individual limits of course).