Are Self-Managed Super Funds (SMSFs) Worth It?
Investing in property through your SMSF needs some research. Investing in residential property through self-managed super funds can be a pain compared to buying the property in your own name. In addition to hassles, unexpected bills, bad tenants and strata fights, there are additional rules on what you can and cannot do. It can also be a ground for deception. Therefore, if you are thinking about getting your own SMSF it is important to understand the rules, what needs to go right and what could probably go wrong.
In Self-Managed Super Funds, members cannot use the property. The property cannot also be leased to family members. Other problem that may arise include the employment of tradies which might also lead to unintentional breaches of the SIS Act, (which is the governing law for super funds), by the members or trustees of Self-Managed Super Funds.
If an SMSF decides to borrow money, there is a need to establish an expensive limited alternative borrowing arrangement. There is also a need to make sure that the borrowed money is not spent on items that the Australian Tax Office or ATO might consider as improvements. Properties with multiple deeds and property developments might cause the SMSF trustees to violate or breach the SIS Act in ways they do not realise themselves. In most cases, SMSF property investing has a negative impact on the SMSF or Self-Managed Super Funds.
But why do members of SMSF invest in properties?
Members and trustees of Self-Managed Super Funds invest in property for tax purposes. Super funds only pay 15 percent tax on its ordinary income and 10 percent on capital gains. If the fund is already paying members pension or in a pension mode, there are no taxes to be paid at all.
However, do not be confident that the profit and tax benefit of an SMSF will ultimately be worth it. Financial advisors might show you a nice looking set of figures but this is of little help if reality does not make them happen.
If you have bought an SMSF property investment without having to borrow money for it, you might be worried if it is a good investment or not. If you are borrowing a huge part of the purchase price, the success of your SMSF hinges on two things: the future for SMSF loans and the capital growth rate of the property.
When borrowing money to invest in property, the interest on the loan usually offsets the rental income or if it is greater. It also creates a negative gearing deduction. This results, in the early stage of investment, there is little benefit in using Self-Managed Super Funds. If it is negatively geared, members and trustees are worse off than if they bought the property in their own name.
Whether you get an overall tax benefit from investing through an SMSF, it will entirely depend on the capital growth achieved. You can save a lot of tax if you make a big profit on a sale. However, if you borrow a large amount of money and achieve low capital growth, you might find the pain and hassle of investing through Self-Managed Super Funds as pointless.
Property investments with Self-Managed Super Funds may also be a bad option if differential pricing on property loans becomes normal or if SMSF lenders withdraw from the market. Increasing interest rates on investment properties may even cause paying half a percent extra every year if you have a loan using your SMSF. The trend that goes into differential pricing could in the future make SMSF loans charged at even higher rates. A bad scenario that becomes worse is if lenders start exiting the SMSF lending business altogether. Lenders might also follow the National Australian Bank of stopping to write SMSF property loans. SMSF loans are not locked in like regular home loans. They usually have review events that allow lenders to reassess and potentially terminate them for simple things like when the fund is switching to pension phase.
Going through the hassle of an SMSF property investment may end you up paying higher interest rates down the track or having the loan pulled which will force you to sell the property. You also have to worry about forest fires and higher taxes on capital gains or super.
Borrowing money within Self-Managed Super Funds to invest in property is a gamble on strong capital growth and no adverse changes to the SMSF loan market or super rules. Therefore, before deciding to get yourself an SMSF and investing through it, you have to make sure that you understand these realities and their consequences. Knowledge of what you are getting yourself into is your best shield in making the right investment decisions for yourself. It would also be best to get the services of an SMSF auditor or a professional to help you make the most ideal decision.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.