I want to talk about your super today, because it’s such an important subject to real estate investors…
But, because government rules have become so strict and I haven’t practiced accountancy in years (I’ve been just a bit busy in real estate investing)…
My licenses aren’t up to date.
So, rather than be out of compliance by discussing this topic, I’ve brought in Tasha Hungerford, a CPA and Partner from Grow Accounting, to tell us more about it.
Tasha, take it away…
Thanks, Dymphna…
For many of you, your superannuation fund is the forgotten bit of money that goes unused or underused…
And that’s a shame because it’s our last legal tax haven in this country, so you ought to be contributing to it to benefit from the tax advantages that come with it.
By paying less tax on your super contribution, you’ve actually gotten less money taken out of your pocket…
And more going into the investments in your superannuation.
Now, I want to advise you that you should be taking advantage of your superannuation, no matter how old or young you are…
And think about how you can invest that money!
In fact, it may be advantageous to throw a lump of money from a property sale or sale of shares into your superannuation.
Powerful tax advantages
The tax advantages of your superannuation are quite powerful…
Any money you contribute is only taxed at 15 per cent and capital gains after 12 months are only taxed at 10 per cent…
But in the pension phase, your taxes from your superannuation fund are zero!
When you can access your super depends on when you reach preservation age, but usually it’s when you’re in your fifties…
However, the latest age to begin payments is 65.
So if you’re not taking advantage of this tax haven, you should be!
The Self-Managed Superannuation Fund
You can do a lot more your superannuation than you used to…
Because you don’t have to rely on somebody else to manage your assets.
You can open a Self Managed Superannuation Fund (SMSF) that is just what it sounds like, a superannuation that you control yourself…
Which can help you build your property portfolio…
By borrowing from it to buy real estate!
The legalities are important, but they aren’t too complicated…
A SMSF is just like a trust structure with a trustee in place…
In fact, it’s exactly like that.
You’ll want a corporate trustee for your SMSF, that is above the company…
This is so that whatever happens, you have the company above it for asset protection.
Setting up a SMSF
Setting up a SMSF with isn’t cheap…
It’s about $2,600 normally, but with a property added to it, it will cost about $3,600…
As well as maintenance costs of about $1,500…
Any additional asset classes will also add to the maintenance costs.
If you’ve got say, five or six properties and other assets in there, maintenance of the SMSF will take a little more work and cost a little more.
Think of these costs as if you’re actually running a business.
Also, those maintenance costs will include the audit fees and preparing the tax filing paperwork…
You are required to prepare yearly financials and tax returns for your SMSF for audit…
It’s not an ATO audit, but an independent auditor to verify that financials have been filed and they reflect what has happened in the fund that year.
And to begin, the set up process for a SMSF takes a bit of time…
You have to apply for a tax file number and AEN from the ATO. This can take up to 28 days…
Then, depending upon where that money is sitting, it could take a while to get your money moved over to your new SMSF…
Figure another two or three weeks for that to happen…
So setup takes a bit of doing and a bit of time before you will have it ready.
Contribution types and limits
Now, there are two different kinds of contributions you can make to your SMSF…
Concessional contributions are those contributions from your company, employer or yourself…
The limit is $25,000, up to 50 years old. If you’re over 50 years old, it’s $35,000.
Non-concessional contribution limits are much higher…
Say you’ve sold a car or a property or you’ve just got some additional cash on hand…
Those kinds of contributions would be non-concessional contributions.
The limit on non-concessional contributions is $150,000 a year…
Or, you can use the bring forward rule where you can add another two years, which is $450,000 or three years’ contributions in one year.
This is a per person limit, so in a husband and wife scenario…
They can put up to $900,000 at one time in non-concessional contributions if, say, they sold a property and had that much money to contribute.
But be careful!
Any amount you go over in your concessional contribution will be taxed at your normal, marginal tax rates, so you really want to stay at or under those limits…
Because super rules can change from year to year and you want to be careful not to breach those limits.
Borrowing rules
In 2007, the rule were changed in order to allow you to borrow from your SMSF…
Since then, clients have borrowed from their SMSFs to get into more investment properties than they otherwise would be able to.
But, you’ve got to follow the rules…
To borrow from your SMSF, you need to set up a limited recourse or bare trust…
This bare trust will have not charge over your other assets in your SMSF.
This is to protect those remaining assets in your SMSF unrelated to the real estate assets.
However, this bare trust is also still protected and governed by the same rules as your other assets in your SMSF.
Now, when you’ve found a property you want to buy, be prepared for the SMSF borrowing process to take a bit more time than you might normally need…
The whole approval process will take a little longer than a typical loan because you’re buying with your SMSF…
So you’ll want to ask for a longer settlement period.
But once you explain that you’re borrowing from your SMSF, most real estate agents are happy about it…
Because they view it as sure thing, since they know that the money is already there.
The sole-purpose test
Just remember that the property you’re acquiring has to be allowable under the rules…
You can’t buy property for present benefit.
Buying a residential property from yourself, or even a holiday house, is not allowed.
The sole-purpose of the property must be for your benefit in retirement only.It has to pass the sole-purpose test…
Unless it’s a commercial property…
In that case you are allowed to run your business out of it, but the property can’t be anyplace that you can stay in, not even on the odd weekend.
If you’re not sure if the property is allowable, just ask yourself if you’re getting a current benefit from the property transaction…
If you are, it’s probably not allowed.
For further questions, I will be happy to talk to you.
Many thanks!
Tash Hungerford, CPA and Partner, Grow Accounting
Thank you, Tasha, for this very helpful information!
Real estate investors, be sure to take full advantage of this…
Before the rules change again!