Self managed superannuation funds (SMSFs) are becoming an increasingly popular option for individuals looking to increase their retirement funds and to branch out into new forms of investment. In light of recent changes to the laws surrounding SMSFs, I've decided to share the following article by EBM Insurance, which appeared in the September edition of Century 21 Wentworth's Property Investor.
Property - potentially a "super" investment
The taxman has clarified previously-confusing rules on renovating and improving investment property within self-managed superannuation.
Combined with share market volatility, the Australian Tax Office ruling SMSFR 2012/1 could potentially boost the numbers of people borrowing within self-managed super funds to buy residential investment property.
According to the ruling:
Cosmetic renovation, such as retiling, can be done as a "repair" under super law, even though it can't under income tax rules - and can be done within super using borrowed money.
Improvements to a property, such as moving internal walls, are allowed if the "fundamental character" of the asset does not change - but can only be done using non-borrowed money.
Improvements which fundamentally change the nature of the asset, such as turning a single dwelling into a duplex, are not allowed if there is still a loan on the property.
General Manager of RentCover, Sharon Fox-Slater, said that the recent decision is just one of many that apply to self-managed super, the rules for which are complex - so it's crucial to obtain professional advice before signing any contract, let alone paying a deposit.
She added that it is important to have landlord insurance regardless of whether the property is held within a self-managed fund or separately - and that regular landlord insurance is suitable for property held within super.
Some of the chief advantages of buying property within self-managed super include:
Access to an investment type seldom held by retail super funds.
The ability to use leverage (borrowed money) to buy an asset.
The ability to use salary-sacrificed, pre-tax dollars to pay off the loan.
The SMSF pays a maximum of 15 per cent tax on the rental income.
Personal control via the ability to select your own asset.
Capital gains tax savings if the property is sold, and
"Non-recourse lending", which means that the bank can't seize other assets to repay the loan in the event of a default.
Some of the disadvantages include:
The performance of a single asset potentially dominating your retirement future.
Administration and compliance headaches and costs.
All the risks that normally apply to any property investment such as the market falling or poor property selection.
Banks require a bigger deposit, typically only lending 75 per cent of purchase price.
Bigger bank fees, and
The risk members might need to kick in extra money if cash flow is insufficient.
For more information about EMB's range of insurance products please visit www.ebminsurance.com.au.