Realty Deal April 2013

“The United States have developed a new weapon that destroys people but it leaves buildings standing. It's called the stock market.” Jay Leno

Well, the Australian stock market has actually proven to be a bit of a winner of late with most stocks improving including the banks, resource and health related stocks posting positive gains. This is good news for all Australians, even those who don’t necessarily ‘buy and sell’ stocks themselves because most of us have money tied up in shares through our Superannuation.

Most Superannuation funds have at least some of their funds under management invested in Australian shares; particularly ‘blue chip’ shares such as the major banks etc. Some Super funds also invest in property trusts in order to gain the advantages of both capital growth and returns through rent etc, without having to necessarily own individual properties (which may not provide the fund manager with liquidity in the event that cash needs to be freed up for any reason).

Australians are moving more than $14 billion a year from their industry or employer superannuation funds into self-managed funds. It is a big trend, which shows that people like the control that operating their own super fund gives them. However, it is important to recognise that the control a self-managed fund offers comes at the cost of much greater responsibility. What makes a self-managed fund different from other kinds of super is that the members must also act as trustees; therefore, they have to take on the administration of the fund.

Almost a million people bear that responsibility, so it can't be too bad. But it is worth keeping in mind that the Australian Taxation Office (which is responsible for the regulation of self-managed funds) declares a couple of hundred funds non-complying each year because the trustees have done a bad job. Once a fund is made non-complying it loses all the generous tax concessions that the superannuation system allows.

And the government is increasing the burden of responsibility on trustees. Part of its Stronger Super reform package includes requirements for more rigorous fund auditing and accounting and more regular fund reviews.

One of the big new trends is the increasing number of investors buying property with their self-managed super funds (SMSFs). Back in 2007, the super rules changed to allow people to borrow through their super funds for investment. It’s taken a while for people to get used to the idea of running their own super fund, let alone borrowing through it to buy a property. However, with more and more people setting up their own super funds today, there has been a significant flow-on effect in the property market.

Figures from the Australian Tax office show a 50 per cent increase in property investment via SMSFs over the past six years. Just like the First Home Owners’ Grant prompted more first homebuyers to get into the property market, more people are taking advantage of the opportunity to borrow up to 70 per cent of a property’s value through their SMSF to buy an investment. Obviously, individual Super funds have to have sufficient funds in order to purchase/borrow to buy an investment property and this therefore normally precludes people in their 20’s and sometimes 30’s (depending on their salary and super accumulated over their working life).

Investing in property through your SMSF is becoming more popular because there are very strong rental returns available, the costs have dropped and more people are realising the benefits. It could also be that a lot of people ignored the opportunity before because running your own super fund sounds pretty daunting and the structures used to buy property through your super are pretty complicated.

On paper, buying property with your super sounds like a great idea and there are definitely many benefits. However, there are also many rules and regulations so we wouldn’t recommend using this strategy without getting some independent advice first. Here are the main advantages and disadvantages.

Advantages
• If you buy a property with your super fund and hold the property until after you retire and your super goes into the pension phase, you pay no tax on either the capital gains if you sell or the rent if you continue to hold your investment.
• Before retirement, capital gains and rent earned by your SMSF are taxed at only 15 per cent (if you hold the property for more than a year, this reduces to 10 per cent on capital gains).
• Direct control of your super investments and a real understanding of where your money is invested.
• Diversification in your portfolio (ie. if you also hold shares in your Super).

Disadvantages
• If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the fund – not your regular income.
• You can't live in the property and neither can any friends or family members.
• You can’t renovate a property purchased through a SMSF while it is still under a loan.
• There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
• Running a SMSF is complicated and penalties for getting things wrong are high. (However, you can pay a professional to run it for you).
• Buying property through a SMSF is generally only suitable for funds with $200,000 in combined funds.

Buying property through super is a great way to invest for retirement but it’s probably more relevant for people who are only 20 to 25 years away from it. Not only do they have more super money at their disposal, they are also more likely to be able to hold the property until after retirement to realise those big tax savings. (Source: John McGrath, Property Expert)