The Self-Managed Superannuation Fund (SMSF) market is about to explode and its evolution will have an impact on the property market as well as the financial planning industry.
Such a fund means, as the name suggests, that you are directly responsible for the management of your own superannuation.
Up until now, most of us have been turned off by the thought of having to do all this work surrounding our super and, really, given the costs and effort involved, it has been the right choice for most of us to leave it to the institutions.
However, changes in the laws made to SMSFs with regard to geared investments in real estate have moved the playing field, and financial planners are reporting significant interest from clients about how to buy an investment property using their super.
So why all the interest? When looking at the opportunity here, there is much to offer.
For example, any capital gain on a property is taxed at no more than 10 per cent. In addition, if your property has a positive cash flow, the net income is charged at no more than 15 per cent.
On top of this, it’s now possible for super funds to borrow up to 70 per cent of the value of the property.
The set-up costs have also dropped and now average about $5000. So this works for funds that have $200,000 or more in cash.
Furthermore, for those worried about being sued at some point in their lives, SMSFs have been known to offer some protection benefits.
However, one should also be aware of the drawbacks. For example, while negative gearing is possible, it will only apply to the other income earned in the fund. You cannot offset the negative-gearing benefits to your own personal income.
You should also be aware that you can’t live in the property until you retire. And you can’t have your family and friends using the property.
The Australian Taxation Office and others are looking closely at this. Perhaps the play here is keep your negative cash flow properties under your name and the positive cash flow ones under your superannuation fund.
It is also important to recognise superannuation isn’t about a tax break. It’s about ensuring you have enough money to live comfortably in retirement.
There are concerns about those who already own real estate and then decide to gear up further into a single asset class using this last vehicle for long-term savings. Where is the diversification here? In the event of a property crash, they could be totally wiped out.
In the end, it really boils down to your own personal financial circumstances and goals. And with that, you should also seek the advice of an independent financial planner or accountant.