Pharmacists looking to achieve investment goals sooner during the new financial year should take advantage of opportunities for Self Managed Super Fund (SMSF) investment outside the Pharmacy. Accelerating your wealth sooner by making the most of changes to Australia’s superannuation laws is a good first step.
Until recently, self-managed superannuation fund (SMSF) trustees could only acquire real or direct property for their super funds if they could afford to buy it outright.
However changes to superannuation laws mean that SMSF trustees can now borrow and invest directly in property, broadening the scope for investors to use residential property as a wealth-building and income-generating tool.
Advantages of investing in property through a SMSF
Once you have established your SMSF in compliance with current superannuation law, members of the fund can gain access to significant tax efficiencies available in the superannuation environment.
These tax efficiencies mean investing via a SMSF may give you more after-tax money available to pay down your loan faster. Paying down a loan faster saves interest over the term of a loan and may assist you in building wealth faster for retirement.
This may mean the SMSF can acquire a larger and more diversified portfolio of investments.
Some of the advantages of purchasing property in a SMSF are:
- Interest expenses and other property related expenses, including depreciation allowance, are tax deductible for the SMSF,
- Earnings on the fund are taxed at a rate of 15%. In contrast, if you owned the property in your personal name, the earnings would be taxed at your marginal tax rate. For many people their personal marginal tax rate is more than 30 cents in the dollar,
- If you sell the property held within the SMSF, any capital gain relating to the property will be taxed at an effective rate of 10%. By contrast, if you owned the property in your own name, capital gains would generally be taxed at 50% of your marginal rate,
- When members of the SMSF reach retirement, specific assets relating to those members are income and capital gains tax free.
How SMSFs can borrow to invest in property
The new borrowing guidelines are outlined in detail in the Superannuation Industry Supervision Act (Cth) 1993 (SIS Act). But broadly, you can borrow to invest in a property using a SMSF if you follow the guidelines below:
- The loan has to be for a property being acquired by the SMSF, it cannot already be owned by the SMSF. The property must be held on trust for the SMSF while the borrowing is in place. This trust is separate to the SMSF and is often referred to as a ‘bare trust’ or ‘custodian’,
- All of the benefits associated with the property (such as income and capital gain) must be provided to the SMSF and the SMSF has to be able to pay out the loan at any time and gain full title to the property,
- Any lender’s recourse or security against the SMSF’s assets has to be limited specifically to the property being purchased by the SMSF, not to any other assets held by the SMSF.
It’s important however that you obtain legal and accounting advice from licensed advisers when considering investing in property via a SMSF.
Superannuation law is complex and as such, careful management and sound advice are of paramount importance. Penalties for non-compliance can be severe and future retirement savings may be directly affected.
What finance options are available for SMSFs looking to invest in property?
Pharmacists looking to invest self managed super in property need to fully understand how lending products fit with property investment goals before making investment decisions.
A key issue in recent times has been the significant amount of time and money required by the SMSF trustee to set up their own ‘bare trust’ or ‘custodian’ and liaise with lenders in order to adapt loan documentation to comply with the changes to the law.
It’s important that you seek out loan packages specifically for SMSF property investors.
An integrated SMSF financing solution that includes the required ‘custodian’ and changes to the lender’s security (or loan recourse) supported by external legal and taxation opinions, like Commonwealth Bank SuperGear, is an ideal solution.
Commonwealth Bank SuperGear significantly simplifies property investment in a complex but highly tax advantageous area – giving you the opportunity to use tax savings to accelerate ownership of the property.
To learn more about how we can help ensure you’ve got the right banking and finance solutions for your Pharmacy, call Mark Churchill, Market Development Executive on 03 8627 5930 or visit www.commbank.com.au/healthcare
Peter Schiller is the National Head of Commonwealth Bank Healthcare Banking, a specialist team of business bankers dedicated to providing tailored financial solutions to Healthcare professionals around the country.
This is general information and does not take into account your individual needs, circumstances or objectives. You should consider the appropriateness of this information in relation to your own situation before acting on it.