Holding a property through superannuation is becoming more attractive for a number of reasons.
- Diversification – As you can now borrow in your fund, you do not need to use a large portion of your fund to purchase the property. This allows you to diversify away from traditional super holdings such as cash, bonds, equities and managed funds.
- Cash flow- With interest rates in a downward cycle, especially fixed rates, the cost of holding a borrowed property has fallen. Additionally as more lenders enter the market, interest rates have become more competitive
- Tax Concessions within Super – This is a benefit of holding assets within the super environment. In the pension phase of super, there will be no tax on the income or capital gains of your investments, regardless of when you purchased the asset.
- Borrowing Capacity – Your super fund borrowing capacity is treated differently to your personal capacity. Provided you have the sufficient cash flow to support the loans, the super will allow you to increase your overall borrowing capacity.
As with any strategy there are others factors that you need to take into account when deciding on purchasing a property in superannuation. They include:
- Appropriateness – The thought of purchasing property in your super may seem appealing at first glance, but you need to determine it fits your overall wealth creation strategy.
- Liquidity of fund – Given the illiquid nature of bricks and mortar, you want to ensure you do not lock away the entirety of your fund, especially if you are approaching retirement and your superannuation will be your only income stream. In addition, the fund needs to be in a position to pay out death benefits at anytime. This is where it is really important that you understand your insurance requirements within your fund (Just recently some new legislation has been released around this issue)
- Inside versus Outside – It is worth calculating the difference of purchasing the same property outside of super versus inside. Depending on the specific property and your tax rates, it may be more beneficial to purchase the property in your own name.
- Complexity – Purchasing in super is not the same as outside. There are some key differences in relation to the structure of the purchase, the loan and who can be the tenants. If you get any of these wrong, the consequences can be quite severe.
- Costs – Although these have come down significantly with more competition entering the market, there is still a very large disparity between different providers.
In addition to the traditional strategy mentioned previously, there is now a further advancement around the borrowing rules for related parties. This is effectively where the member becomes the ‘lender’ to the superannuation fund. There is the potential to charge a lower and possibly nil interest rate on the loan. This could be an opportunity to reduce costs within the fund and so build up the balance more quickly. Make sure you are very careful with this strategy and get some professional advice before you implement due to the complexity and uncertainty around the legislation.
There are so many variables within the strategy, and the success lies in the ability to have it tailored to your personal situation. There is no one size fits all solution.
By Myles Thornton
Ark Total Wealth Financial Adviser