The Federal Government changed the rules on borrowing through superannuation funds in September 2007.
“This change has opened up a fantastic opportunity for many everyday Australian property investors,” according to Rebecca Howarth of PEB Financial Planning.
“While the rule changed some time ago, it has taken the banks, the tax office and the industry some time to work out all the requirements, policies, paperwork and implications.”
“However the banks all now have their products and policies in place and the industry has developed the technical knowledge to implement strategies to make the best use of the rule change,” Mrs Howarth said.
This is a big change because previously you could not borrow to buy an investment through your superannuation.
A New Investment Approach
“It’s a different approach to buying investment properties, as traditionally you wanted to negative gear properties and use tax advantages to reduce the mortgage,” Mrs Howarth said.
“In a super fund there are a lot less tax concessions as a super fund already has a 15% tax concession.”
“So you are not necessarily looking to negatively gear a property in a super fund, you are really looking to positive gear and pay off that mortgage as quickly as possible.”
Ideal for Established Investment Properties
“This makes this strategy ideal for established properties with positive cash flow.”
"Apart from the rental income, you can also use your own and employer superannuation contributions to pay down the mortgage.”
“And by paying off the mortgage quicker, you end up with an asset that’s not encumbered, so you end up with a larger retirement benefit.”
Capital Gains Tax
“Then when the fund switches to pension phase, you have the opportunity to eliminate capital gains tax.”
“In terms of capital growth and minimal tax it’s a fantastic strategy,” Mrs Howarth said.
An added benefit is that couples can combine their super into one fund; and you can also include other family members in the fund, Mrs Howarth said.
How to Set it Up and Deal with the Paperwork
However, Mrs Howarth said there was a lot of work to do to set up the structures to take advantage of the rule change, and the associated red tape had put a lot of people off when trying to do it themselves.
First of all it requires a BARE trust or custodian trustee; however, your financial planner can set up all of the required structures and documentation for you.
But you do need to make sure that the setup at the start is right and that you fully understand why you’re doing it.
As we keep saying it’s all about getting the strategy and structures right at the start. And for that you really do need to go and see a professional financial advisor to work out and setup what is best for you and your investment goals.
“It will be different for everybody,” Mrs Howarth said.
“The first step is to assess your current financial and investment situation; then we will write up all our recommendations and if you decide to proceed we will set up all the required entities.
- You can borrow money to purchase property
- Positive cash flow
- Use employer contributions to reduce mortgage
- Use rental income to reduce mortgage
- Rental income is only taxed at 15%
- Opportunity to eliminate Capital Gains Tax
- Ideal for buying established properties
- You can combine partner and family super contributions
- Loan Value Ratio (LVR) of 70/30%
- Family members can’t live in it
- Can’t redevelop or value add
- Lots of paperwork
Looking to invest in property without using your super but not sure of the advantages?
*This article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser.
PEB Group is a complete property advisory service for Perth families. Offices are located in Inglewood and Willetton, Perth, Western Australia and offer service in - Financial Planning · Finance Broking · Property Management · Property Sales · Property Investment · Development
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