A greater number people in Australia are now looking at alternative ways to improve the control of their assets within their estate. One area is through self managed superannuation. Buying property with superannuation has become a specialised area of expertise for wealth creation.
This case study shows us an example of using a self managed super fund (SMSF) to buy property.
Bob is a management consultant living in North Sydney and is married to Emma who is a doctor at a medical practice in East Sydney, they have two super funds accordingly, with a $100,000 in each fund and are aged 50. They decided to setup a self managed super fund (SMSF) for more control and flexibility. They then roll over the total of $200,000 into their SMSF.
They then calculate with their adviser that they can buy a property with super in Sydney for $550,000 using a deposit of $100,000 and the rest in borrowed funds or a loan of $450,000. The other $100,000 is left for other investments and to provide some liquidity to the fund.
The table below shows a summary of the potential projected results over 15 years:
| Super Fund No Property |
Property in SMSF |
|
| Current Balance |
$200,000 |
$200,000 |
| SMSF Loan |
$0 |
$450,000 |
| Total Assets |
$200,000 |
$650,000 |
| Annual Return |
5.5% |
5.5% |
| Gross Value 5 Years |
$261,391 |
$849,523 |
| Gross Value 10 Years |
$341,628 |
$1,110,293 |
| Gross Value 15 Years |
$446,495 |
$1,451,109 |
| Net Value 15 years |
$551,806 |
$1,001,109 |
Note: The above returns assume a 5.5% net rate of return compounded each year and does not take into consideration any additional fees, costs and taxes. The above example also excludes contributions made to super. These returns are only projections and no guarantee of future performance.
Depending on the level of their contributions to superannuation that Bob and Emma make before retirement, the SMSF loan could be completely paid out by the time they reach age 65. At this point the super fund (SMSF) could then take full custody of the Sydney property (from the custodian trust) without paying any capital gains tax or stamp duty. The rental income would continued to be paid to the SMSF and then once Bob and Emma retire they could draw a tax free income from the super fund as a pension.
The rental income would also enjoy a tax free environment inside the SMSF as long as the fund members have converted it to a pension. There is typically a NIL tax rate in the pension environment.
Of course you also need to take into consideration the cash flow costs of the SMSF loan, initial costs such as stamp duty and ongoing maintenance costs. On the basic numbers though, the concept of buying property in super could be very compelling for any diligent investor.
Whether the setup of a SMSF or buying property though self managed super (SMSF) is the right strategy for you will depend on a whole host of factors, so always seek appropriate expert advice from your financial adviser and or a qualified SMSF accountant before making any decisions.
Get advice about your superannuation matter from a local tax accountant in the Sydney CBD, contact us.