When it comes to property investing, the merits between investing in your own name and through a superannuation fund have long since been debated. In reality there are pros and cons to both, and many factors to consider such as:
- Do I have to borrow money to afford the property?
- Should I borrow money?
- How much existing collateral do I have to offer as security for any borrowings?
- Will the property be negatively or positively geared?
- How long do you plan on owning it for?
- Are there plans to develop the property, if so, how soon?
- How much rent will be received?
- What would be the consequences if there was no rent received?
To put it simply investing in your own name provides you with short-term tax benefits (particularly through negative gearing) and the ability to spend the asset’s earnings on personal consumption at any time. On the other hand, superannuation provides longer-term tax benefits but all of the earnings are locked up in your super fund, generally until at least age 60.
But there is a way to do both at the same time. It involves purchasing the investment property in trust. You then invest in this property trust both individually and through an SMSF, or any other entity or investor you choose.
Reduce tax & fees
A key advantage of this structure is the ability to transfer units between the different investor entities. This allows you to increase the SMSF share of the investment gradually, rather than having to sell a big, lumpy asset. The taxation benefits can be enormous plus you also avoid stamp duty on the unit transfers. Of course, the SMSF either needs the cash to pay for the units or the amounts transferred must be within your contribution limits.
There can be additional benefits for farmers and business owners. Firstly, you can reduce or eliminate any CGT by claiming a tax deduction for the amounts contributed to the SMSF. Instead of paying CGT at your marginal tax rate, you pay a 15% tax on the concessional contribution. Secondly, you can use your business property as part of this structure, leasing the property from the trust. This allows you to inject even more of your personal wealth into the highly tax-advantaged superannuation environment.
Proceed with caution
As great as this strategy sounds, every care needs to be taken to ensure it is structured correctly or you can fall foul of the ATO. Some of the key restrictions are:
- The property trust cannot borrow
- The investment property cannot be used as security for any borrowings
- All transactions must be done on commercial terms