Self Managed Super (SMSF)
The SMSF sector is the largest sector of the Australian super industry, with 99% of the number of funds and 31% of the $1.6 trillion total super assets as at 30 June 2013.
Self Managed Super Funds (SMSF) are now not only the largest sector in superannuation (by asset) but also the fastest growing, increasing in number by about 6 per cent a year.
The control and flexibility that SMSFs offer, as well as the tax-planning and estate-planning features and the possibility of lower costs than publicly-offered superannuation funds, make them attractive to retirees and pre-retirees in particular.
SMSF Investment Property
Recent changes to the SIS act has allowed SMSFs to borrow. Banks have now developed SMSF loans catering purely for this change to the ACT and to enable SMSF's to borrow for residential property, commercial property and industrial property. There are restrictions placed upon the fund that the trustees of the fund can not gain a personal advantage from asset acquired by the fund. For example you would not be able to live in the home that is owned by your SMSF.
SMSF or a Personally Held Investment Property?
The SMSF would be expected to have tax advantages as compared to holding personally. On the other hand expenses, interest rates and depreciation treatment may favour the personally held structure. At different potential exit dates the one structure or the other may be advantageous.
During accumulation phase, the SMSF tax rate on assessable net income is 15%. This rate also applies for capital gains in the first year of ownership, after which it drops to effectively 10% (i.e. one third of the gain is not counted). Once pension phase has been reached, these rates drop to 0%.
For any cash support needed, whether this is directly paid or via a salary sacrifice contribution to the fund, it will reduce taxable income by the top marginal rate. Support via the fund will use part of the concessional contribution cap and limit any transition to retirement tax strategy implementation. To limit the cash support needed, it would be possible to cover negative cashflows with SG contributions or non concessional contributions if the cap has been reached.
The tax offset for the depreciation allowance is different. If the property is held directly then the reduction is at top marginal rates. The value of the offset – if held by the fund – may be a lot lower and is the fund tax rate.
We need to evaluate which strategy produces a better outcome.
The suggested evaluation methodology is to evaluate the impact that the strategy has on the individual’s personal wealth. Consequently, when expenses from the investment are more than the income, the cost to the individual is this difference less the tax on it. It doesn’t matter if the property is held directly or via the SMSF for the cash support element. Both deductible expenses and salary sacrifice contributions will have the same impact on take home salary.
The evaluation methodology can be thought of as the rate of return that connects the outflows and receipts. Initially, there will be a deposit and establishment costs outlay. Eventually, at some stage there will be a sale of the investment property less the mortgage, sale costs and capital gains tax to be paid. In the intervening years there may be negative or positive cashflows. For a directly held property, this impacts directly on assessable taxable income. If held by the SMSF it is a little different. Positive cashflows will be held in the fund and worth net of the fund tax to the personal wealth of the individual. Supported cashflows by SG contributions will be worth 85% of the cash support needed and have no impact on the individual’s take home pay.