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ยป You can invest your super in property

Date published: 26/06/2010

You can invest your super in property

Most people these days are aware of Self Managed Superannuation Funds, commonly abbreviated to SMSF’s.  Rather than have some faceless fund manager look after what is likely to be your largest financial asset, people with SMSF’s take control over the decision making concerning their fund.  That doesn’t mean they necessarily do all of the day to day administration and investment research (though some do), for their fund.  They get involved in how their money will be allocated, and ensure the investment strategy is tailored with their particular time frame, objectives, and risk tolerance in mind.

Given these advantages, it is little surprise that the SMSF sector is now the largest within the superannuation landscape, and also the fastest growing.

One area of investment which is helping drive the take up of SMSF’s is property investment.  We all know that Australian’s love their property investment.  Whilst SMSF’s have always been able to purchase investment property, in the past they were restricted by the fact that SMSF were unable to borrow.  This has now changed.

Following rule changes in 2007, and several subsequent fine tuning efforts by both the government and the SMSF regulator, the ATO since, using an Instalment Warrant structure to enable your SMSF to borrow and acquire an investment property is now well established.  You can find a diagram showing the Instalment Warrant process here.

So when considering your next property investment purchase, should you buy the property with your superannuation savings?  Here are some pro’s and con’s to consider:

Pro’s -

* Lower tax – SMSF’s pay income tax at 15% and Capital Gains are taxed at 10%.  Even better, once you are in the pension phase, there is no income tax or CGT.

* Potentially less volatility than shares.

* Gearing magnifies returns.  By using borrowed funds, you are able to make a larger investment, which therefore has the potential for larger gains.

* SMSF’s a typically cheaper to run than other superannuation funds, with the cost savings more pronounced the larger the balance.

* Your superannuation contributions will go into your SMSF, making servicing of the loan easier.

Con’s -

* Lack of diversification – a large part of your retirement savings is tied up in one single (fairly illiquid) asset.  This poses a genuine risk.

* Establishment costs are significant.

* For small balances, SMSF’s are likely to be more costly than other superannuation alternatives.

* There is a higher level of administrative responsibility for the SMSF owners. (This can be outsourced).

* Borrowing to invest always entails risk.  The debt and interest will need to be paid, even if the property declines in value or is untenanted.

Important Notes -

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives and should NOT to be construed as legal, professional or financial product advice. You should obtain a Product Disclosure Statement and consider obtaining personal financial advice from an Australian Financial Services Licensee, or representative thereof before making the decision to acquire, vary or dispose of any financial product.

Whilst all reasonable efforts are made to ensure that the information contained herein is accurate and reliable the parties make no representation or warranty regarding the correctness or reliability of the information provided.

For more information, or to discuss your specific situation, please contact me directly.

Paul Benson
SMSF Specialist - Owner / Principal
Guidance Financial Services Pty Ltd

Now that you have read this, what do you think?  Do you have other ideas?  Please share you views with other members (eg by blog or on the discussion forum) and/or request professional member(s) to contact you directly.

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