SMSF, property and making sure it’s right for you
When it comes to potential property investment, you should always a consider the appropriate entity or “vehicle” in which to buy the property.
Factors that should be considered when making this decision include tax minimisation, asset protection and the costs associated with the purchase.
It is becoming increasingly prevalent for people to invest in property using a self-managed superannuation fund as their preferred vehicle, particularly when considering tax minimisation.
There are potential income tax and capital gains tax concessions available when purchasing in your SMSF. For example:
* The tax rate for SMSFs is 15% on net taxable income which includes concessional (ie tax deductible) contributions.
* After one year’s ownership the tax rate on net capital gains is only 10%.
* If the fund is in pension phase for all members then there can be no tax payable.
But buying property in a SMSF is not for everyone, and there can be harsh consequences if you do not get it right.
Firstly, people should consider whether they have enough money to make buying property in a SMSF worthwhile. This is due to the extra compliance costs associated with a SMSF, like establishment costs, ongoing SMSF auditor’s costs, record keeping and administrative costs, annual tax return costs and ASIC compliance costs if using a corporate trustee.
If your SMSF does not hold enough funds, then the compliance costs may outweigh any tax benefits that investing in a SMSF may provide.
It is therefore important that you obtain financial advice to consider whether establishing a SMSF in the first place is right for you.
Secondly, if after consideration you have decided to establish and invest using a SMSF, it is important to ensure the SMSF is established correctly.
If your SMSF is found to be non-compliant, the Australian Taxation Office can potentially tax the SMSF at the highest marginal tax rate and take you to court personally for breaching the law, as well as other penalties or actions.
When establishing your SMSF you should at ensure the following:
* That a trust deed for the SMSF is drafted, settled and executed.
* The trustee/s swear and lodge declarations as to being able to act as trustees, ie they are not disqualified as a bankrupt, etc.
* The SMSF elects to be registered with the ATO as a complying SMSF and a TFN and ABN applied for.
* A bank account is opened for the SMSF.
* An investment strategy is developed for the SMSF.
If you are intending to borrow funds for your SMSF to invest in property, you will also have to comply with the Limited Recourse Borrowing Arrangement requirements, but I will deal with these in a later article.
The Trust Deed should detail the name of the SMSF, the trustees, potentially the SMSF’s members (though potential members may be able to apply to and be accepted as members of the SMS separately), and the rules by which the SMSF will abide. Note that if there is any discrepancy between the trust deed and the law, the law will prevail.
The SMSF should elect to be registered by the ATO as a complying SMSF. If this doesn’t happen, then the SMSF is not eligible for the tax benefits and cannot accept superannuation contributions and rollovers.
A separate bank account should be opened for the SMSF, and its assets and money separated from the trustees’ and beneficiaries’ personal assets and money, and each member’s account should be calculated.
A SMSF can only have a maximum of four members and all members must be trustees (or have a guardian) or directors of a corporate trustee.
An investment strategy should be developed, and then reviewed regularly. This strategy will guide the trustees (or the directors of a corporate trustee) on a number of issues including appropriate investments, risk profile, diversification of investments, liquidity, and insurance requirements. SMSF strategies should be medium to long-term and adhere to its sole purpose – to provide eventual pension benefits to members.
If complied with correctly, this strategy can be very tax effective. For example, under current rules a member who is more than 60 does not pay tax on pension income nor does the SMSF pay tax on this exempt income.
It is important to fully investigate with a financial advisor whether a SMSF is appropriate to your particular needs and that you get the correct advice to ensure you have the benefit of a compliant and effective fund.
The information within this article is provided for your general interest and should not be relied upon as a substitute for legal or financial advice.