Planning to buy an

Investment Property?
Consider benefits including possible tax savings by purchasing
property through a Self Managed Super Fund (SMSF).

Most investors buy property in their own name or jointly

with a spouse or partner. An alternative that has become
available in recent years is to acquire property investments
through a self managed superannuation fund (SMSF).

Superannuation is a concessionally taxed environment and

SMSF’s, in particular, provide investors with control and
legitimate tax benefits for retirement savings.
SMSF property investments can include most forms of property How SMSF’s can help property
including both residential property and business premises, such
investors save tax
as an office or a dental practice, occupied by a SMSF Member.
Using a SMSF to acquire investment property can legitimately
New rules governing SMSF borrowings (Sections 67A & 67B of reduce tax in four main ways:
the SIS Act) came into place on 6 July 2010. These allow the
1. T
 he ability to pay off debt borrowed to acquire the property
purchases of investment property to be funded via the use of a
using salary sacrifice or personal superannuation contributions;
limited recourse borrowing arrangement. Like gearing outside
this is beneficial to anyone who is on a personal marginal tax
super, borrowing to invest can allow a fund to increase its
rate above 15%;
investment assets and to maximize potential returns.
2. T
 he low rate of tax - 15% - applicable to income (rent) received
This can help to build up superannuation savings more quickly, on investments owned within Super. Better still, this reduces to
which for many is desirable given the limitations imposed by the 0% when the super is converted into a pension;
super contribution caps. Borrowing within a SMSF is a legitimate
3. T
 he low rate of tax - 10% - applicable to long term capital gains
means by which accumulated super benefits can effectively be
received on investments owned within Super. This also reduces
used as a deposit to acquire business premises provided the sole
to 0% if the super is has been converted into a pension before
purpose of the acquisition is to build retirement savings. SMSF
the property is sold;
Trustees should obtain professional advice before undertaking
the acquisition of any property using borrowed funds. 4. Negatively geared property held within a SMSF can be used to
offset income tax payable by the SMSF on new contributions,
Importantly, buying investment property through a SMSF can income or capital gains.
also save considerable tax. Lease payments from a SMSF
member’s business to their SMSF that owns their business
premises are also tax deductible to the business and will help
to build up retirement assets.
1. Using Salary Sacrifice to fund debt repayments
Most investors borrow to help fund the cost of a property purchase and, in some cases, to gain a tax deduction if the property is negatively
geared. Repayments are generally funded from after tax income. However in a SMSF the ability to pay off debt borrowed to acquire a property
using salary sacrifice or personal super contributions is generally beneficial to anyone on a personal marginal tax rate above 15%.

When you compare the borrowing costs of borrowing outside super with borrowing inside super, being able to salary sacrifice into super
rather than repay the loan with after tax dollars can produce a better result by allowing you to pay off debt sooner and save on interest costs.

This approach can be combined with a Transition to Retirement strategy where an SMSF member is age 55 or above, though it
is important to ensure the SMSF has adequate liquidity to meet both its pension payment obligations as well as loan repayments.
Professional advice should be sought before any salary sacrifice or transition to retirement strategy is implemented.

2. Minimizing Tax on Rental Income

Superannuation funds pay a maximum of 15% tax on income (such as rent) so this is considerably lower than many individuals’
personal marginal tax rate. Better still, the tax on income reduces to 0% (on the SMSF member’s share of assets) when being used
to pay a pension.

Tax payable on income derived from an investment property depends, of course, on the income after deductible expenses, including
interest. Properties can be positively (income exceeds deductible expenses), neutrally (income equals expenses) or negatively (income is less
than expenses) geared; thus the tax payable (or the amount that can be offset against other income so as to reduce tax) varies widely.

Most investment properties will either start out or become positively geared over time as rents increase and outstanding debt
decreases. Note, as there is no tax payable on SMSF assets supporting a pension, a negatively geared SMSF investment has less
appeal for investors in the pension phase.

In the case of a $1,000,000 positively geared or un-geared (no borrowings) property, producing income of $40,000 p.a. (4%) after
expenses, the tax liability could be as follows:

Investor Tax Rate Tax Payable Tax Payable over 10 Yrs

SMSF Member in Pension Mode 0% $0 $0
SMSF Member in Accumulation Mode 15% $6,000 $60,000
Individual Tax Payer 31.5% $12,600 $126,000
Individual Tax Payer 38.5% $15,400 $154,000
Individual Tax Payer 46.5% $18,600 $186,000

Over a number of years the tax saving through structuring ownership to benefit from lower applicable tax rates can be considerable.

These rates are current as at 1 December 2010. For current thresholds, refer to www.ato.gov.au
3. Minimizing Capital Gains Tax when the investment property is sold
Investors typically buy property for both the income it produces and capital growth. When borrowings are used the after-tax income is
often small, or even negative, so this makes capital gains even more important. If held for a relatively long time the capital growth on a
well chosen property can be very sizeable, which is great, but this can result in a large capital gains tax liability, particularly if the investor
has a high marginal tax rate at the time the capital gain is realised.

Using a simplified example that ignores transaction costs, a property purchased for $1,000,000 would be worth $2,000,000 after 10
years if it grew at a compound rate of 7.2% p.a. As the asset has been owned for longer than 12 months the long term capital gains tax
discount of 50% should apply meaning the taxable capital gain would be 50% of $1,000,000 or $500,000 if the property was sold after
10 years. The resulting tax liability could be as follows:

Investor Marginal Tax Rate Tax Payable

SMSF Member in Pension Mode 0% $0
SMSF Member in Accumulation Mode 10% $50,000
Individual Tax Payer 31.5% $157,500
Individual Tax Payer 38.5% $192,500
Individual Tax Payer 46.5% $232,500

The potential tax savings through structuring ownership to benefit from lower applicable tax rates are significant.

Outline of how buying property through a SMSF works

•T
 he property purchase process is broadly similar to when you buy a property in your own name. It is very important that the right party
sign the contract of sale and that the SMSF, not you personally, pay the deposit.

•D
 ocumentation of the loan is somewhat complex as the property being acquired must be held on trust for the SMSF until such time
as the borrowing is fully repaid. The trust is now commonly known as a “holding trust” and the trustee must be different to the SMSF
trustee. Specialists should be used to ensure there is no breach of the rules and regulations applicable to SMSF’s.

•G
 etting structuring and documentation wrong can be very expensive, such as through double stamp duty, and the ATO can be
expected to apply the rules strictly. It is strongly recommended that legal advice be sought before any transaction is commenced.

• It is not permissible to acquire assets with multiple titles under one borrowing arrangement. For example, there are special requirements
where an apartment and the associated car parking space are on separate titles.

• In addition to the normal costs associated with acquiring an investment property, such as stamp duty, conveyancing, building
inspections and insurances, loan establishment and associated documentation costs will be moderately higher for investors borrowing
through their SMSF. For investors with an existing SMSF these additional costs are generally between $3,000 and $8,000. Where one
or more investors need to establish a new SMSF first that will typically have establishment costs of between $2,000 and $5,000.

SMSF Loan interest Lender

Purchase Separate
price trustee
Rights of lender
limited to asset

Rent
Investment asset
Funding - there are two potential sources of • Lenders typically charge around 0.5% above their equivalent
standard variable or fixed loan rates for a limited recourse
borrowing that can be used:
borrowing arrangement.
(a) A limited recourse loan from a bank.
• Limited recourse loans from either banks or related parties
•T
 he major banks are active lenders in this sector. do not constitute contributions so can be used to facilitate
•T
 he lender is secured by the property being acquired but is not larger or additional assets purchases by an SMSF where super
allowed to have any recourse to any other assets of the SMSF. contribution caps preclude members adding funds by way of
contributions.
•B
 anks will typically lend up to around 70% of the value of
residential property being acquired, with one bank going to 80%. (b) A related party loan.
•A
 loan to value ratio (LVR) maximum of 65% generally applies to • This is where the super fund members loan the money to their
commercial and rural property. own fund using either their own resources or money they have
personally borrowed secured by other assets, such as the family
•B
 anks generally want interest cover of 1.25 to 1.5 times and
home.
normally ask the SMSF fund members for personal guarantees to
cover any shortfall should the SMSF default on its loan. • The loan should be on “arm’s length” terms, including at a market
interest rate.
•E
 xisting SMSF income and the history of member contributions
will normally be taken into account, as well as rent, in assessing • As with limited recourse loans from banks, the lenders must not
the SMSF’s ability to service the loan. have any recourse against the Fund’s other assets.
•M
 ost loans are on a principal and interest basis for up to 30 • Related party loans are simpler and cheaper to implement than
years, though generally for shorter terms of 10-15 years. Interest bank loans and allow more flexibility in regard to the loan to value
only loans are available for terms up to 15 years. ratio (LVR) and repayments. However, terms should not be more or
less generous from what might be considered to be arm’s length
•F
 ixed and variable interest rate loans are available.
bearing in mind the SMSF auditor will need to sign off on this.
Other considerations – specific to SMSF’s • Owning property through a SMSF can have advantages for
investors looking to protect assets from anyone who might
acquiring property using borrowed funds
potentially sue them.
•T
 he SMSF Trust Deed must permit borrowings; many older
• SMSF Trustees should obtain professional advice before
deeds do not.
undertaking the acquisition of any property using borrowed funds.
•L
 oans can include costs related to the acquisition of a property,
including stamp duty, conveyancing cots and loan establishment Other considerations – general
fees.
• In return for the tax benefits available through superannuation
•L
 imited recourse borrowings are not allowed to be used to make the Government restricts your ability to access your funds before
improvements to a property already owned or newly acquired retirement (or age 55 if you start a Transition to Retirement
by a SMSF. Also, other funds within the SMSF or from personal Income Stream) so investing through a SMSF may not be
sources aren’t allowed to be used to make improvements as appropriate if you may want to access the funds before then.
that could result in the property being deemed a non-allowable
• Not everyone is suited to having a self managed superannuation
replacement asset.
fund; there are some important on-going obligations of Trustees
•W
 ith the exception of property used solely for business and these must be considered
purposes, SMSF Members are not permitted to sell a property
• Any investment by a SMSF must be consistent with it’s
they already own to their SMSF. Transfer of a business property
investments strategy and a property investment should only form
into a SMSF is a CGT event for the existing owner.
part of diversified investment portfolio
•A
 ssets, including property, already owned by a SMSF aren’t
• Investors need to ensure any proposed investment is sound i.e.
allowed to be part of a borrowing arrangement so they can’t
expected returns, income and capital growth, are better than
be used to free up cash for new asset purchases or pension
other suitable investment alternatives.
payments.
• The small business CGT concessions do not apply to business
•S
 MSF member contributions or other fund income can be used
premises owned by a SMSF so this potentially reduces tax
to meet loan repayments where rental income after expenses
savings in some circumstances.
produces a shortfall. Note, the contribution caps may effectively
restrict the ability to supplement rental income, if required. • SMSF undertaking borrowings should normally ensure they hold
life insurance over the members so the SMSF has liquidity to
• If debt levels increase or interest rates go up the loan repayments
fund a death benefit should a member dies unexpectedly.
will increase. This could adversely impact the fund’s cashflow
and potentially force the sale of the asset. • A (sole purpose) corporate Trustee of the SMSF is strongly
recommended, in particular because individual trustees can
•G
 earing increases losses as well as magnifying gains. A gearing
potentially be sued.
strategy may magnify the SMSF’s losses if the investment
decreases in value. In extreme circumstances the SMSF could • Appropriate insurances, such as for fire and public liability, are
lose its entire investment in the acquired asset. strongly recommended for SMSF’s owning property. Note the
potential limitations on use of insurance proceeds outlined in the
• If the SMSF defaults on it’s loan this will likely result not only in
point on replacement asset rules on this page.
a financial loss to the SMSF but complications for the SMSF
members if they are leasing the property from their SMSF as the • Trustees of the SMSF should also ensure adequate insurance is
lender will likely sell the property. in place if the SMSF plans to maintain the asset in the event of
death, TPD, trauma or illness of any members of the fund.
•T
 he ATO has said second mortgages are not permitted.
• Residential property, including beach houses and ski
•T
 he cost of transferring business real property into an SMSF is a
apartments, is not allowed to be rented or used by the SMSF
key consideration. Part of this cost is stamp duty which can be
members or related parties.
significant and is determined by state or territory legislation.
•T
 he NSW Government has reduced stamp duty on the transfer
of real estate into an SMSF to $50 if certain criteria are satisfied.
In particular, the transfer has to be from one or more individuals,
not a trust or company, and the property must be segregated
within the SMSF so it can only be used for the purpose of
providing a retirement benefit to the transferor / SMSF member. If
an in-specie contribution, care is required in relation to applicable
super contribution caps.
•S
 MSF members can occupy business premises owned by their
Fund provided they are leased at market rates.
•T
 he replacement asset rules are very restrictive and the ATO has
said that a property destroyed by fire may not be allowed to be
rebuilt, using insurance proceeds, if the loan is retained. This
means a SMSF would need to use insurance proceeds to repay
the loan and could not re-borrow to fund the costs of rebuilding.
If the SMSF had inadequate funds available to rebuild it might be
forced to divest the property.
Summary
Acquiring property investments through a self managed superannuation fund can have
significant tax advantages as compared with buying the same investment in personal names.

This alternative should be examined by the over 800,000 existing SMSF members or any
long term investor considering the advantages of a SMSF. It is strongly recommended that
legal and tax advice be sought before any transaction is commenced.

Andrew Ramsay B.Com, MBA, FFin, DFS (FP)

Authorised Representative of Financial Wisdom Limited
(Authorised Representative No. 301915)

Email: aramsay@nsfp.com.au
Phone: (02) 9960 6000
Fax: (02) 9960 6111
Website: www.nsfp.financialwisdom.com.au
PO Box 553, Spit Junction NSW 2088
Suite 3, 6 – 7 Gurrigal Street, Mosman NSW 2088
Financial Wisdom Limited
ABN 70 006 646 108 AFSL No. 231138

Important Information
This general advice has been prepared without taking into account your particular financial needs, circumstances
or objectives, and is based on Financial Wisdom’s understanding of current law as at 1 December 2010 and its
continuance unless stated otherwise.
While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain
professional advice before acting on the information contained in this publication. You should obtain and consider the
Product Disclosure Statement relating to a financial product before deciding whether to acquire the product.
Taxation considerations are general and based on present taxation laws, rulings and their interpretation as at 1
December 2010.
Past performance is no guarantee of future performance.
Financial Wisdom advisers are Authorised Representatives of Financial Wisdom Limited ABN 70 006 646 108, AFSL
231138, a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.