Below are three very good reasons to consider investing your super in a self-managed super fund (SMSF), and some things to watch out for as well.
1. Diversify your Fund Assets
One of the great things about SMSFs is they offer a wider range of investment options, and one of those options is property. Spreading your super investment across asset types can help you reduce the risk while still investing for growth.
2. Build a bigger portfolio – and sooner.
A SMSF can borrow to invest in residential or commercial property. Lenders often fund up to 70-80% of the purchase price of the property. While interest rates are at record lows, it could be a good time to take advantage and start building a bigger portfolio now, the idea being to earn more income and capital growth down the track. As long as the returns stay ahead of your borrowing costs, you’ll stay out in front.
3. Save on tax
If you negatively gear your property using your SMSF just like ordinary individual investments, you can claim deductions for borrowing expenses. Investing through an SMSF has additional tax advantages also, with rental income paid to your SMSF is generally taxed at just 15%. And, if you’re over 55 and commence a pension in your SMSF then the rent will be completely tax free. An even bigger cherry on top is that in this instance any capital gains made off the sale of the property will also be completely tax free.
The possible benefits of an SMSF are clear, but you should be mindful of some pitfalls too.
Firstly, your property purchase needs to conform to your SMSFs written investment strategy.
Secondly, you can only use a limited recourse loan when purchasing a property with a SMSF. This is so that if something goes wrong with the fund and it defaults, the other assets aren’t at risk.
The investment must also be only for saving for retirement, so you can’t use your super to pay off your existing home loan or buy a holiday home.
Finally, it’s against the law to buy, sell or rent a residential property to or from a fund member, trustee or a relation. So basically, you can’t transfer a residential property you already own into your SMSF. When it comes to commercial property, the rules differ slightly. Business owners often buy premises through a SMSF then rent them back to the business at commercial rates.