There is no one size fits all answer to the above question. The answer will depend on your individual goals and objectives.
Below we provide a snapshot of the advantages and disadvantages of each option.
Buying the property in your name
Advantages
- All proceeds from the sale of the property will eventually go to you.
- There is no interposed entity holding onto the sale proceeds of the property.
- You do not need to satisfy a condition of release to access the proceeds.
- You can use the increasing equity in this property to buy a second property.
- You do not need to be concerned about changes to superannuation legislation.
- You can get access to the net rent under any circumstances. For example, if you are retrenched.
- You can renovate or develop the property.
- If the property is negatively geared you receive the tax benefits.
- You can pay off the property loan at any time.
- You, your children or relatives can live in the property now or at a future point in time.
Disadvantages
- You are taxed on the net income in your own tax return at your marginal rate of tax which is generally higher than a superannuation’s rate of tax.
- You have to pay capital gains tax at individual rates which are generally higher than capital gains tax rates in superannuation funds.
- You may not have sufficient funds to meet the deposit to buy the investment property. If the property was purchased in a SMSF the existing super balance can be used to fund the deposit.
Buying the property in your SMSF
Advantages
- You can use your salary sacrifice superannuation or 9½% statutory superannuation to reduce the debt on the property owned by the superannuation fund.
- The net income from the property is only taxed at 15%.
- If you sell the property prior to retirement the rate of capital gains tax will be 10%.
- If you sell the property after you retire the capital gains tax rate may be reduced to zero.
- If interest rates increase you are able to use your 9½% super to help meet the increased loan commitments.
- You can use your existing superannuation for the deposit of the investment property.
- Arguably you could buy a better or more expensive property in the SMSF as you have access to more money to fund the deposit, being your existing superannuation funds.
- By owning a property in your superannuation fund it may enable you to diversify your retirement assets. That is, all assets are not tied up in managed funds, property trust or shares.
Disadvantages
- Neither you nor an associate of yours, such as a family member can use this property regardless whether they pay market rent for the privilege.
- The proceeds from the sale of the property cannot be paid to you from your superannuation fund until you satisfy a condition of release. This is a major disadvantage where you are young and you may want to eventually sell this property to buy a bigger or better home.
- If the property is negatively geared the tax losses are retained by the superannuation fund and offset against member contributions and earnings.
- You are limited to the amount you can contribute to superannuation in order to reduce or pay off the loan on the property.
- You cannot live in the premises if it is owned by the superannuation fund even if you pay commercial rent. The only exception is if it is business premises that you use for your business operations.
- Buying a property in your superannuation fund may mean that you have a high percentage of your retirement assets tied up in one asset.
Should you require any further information please feel free to contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.
