The use of self-managed superannuation for property investment and family savings is tipped to rise. But is it right for you?
Nobody wants to pay a $150,000-plus tax bill if they can avoid it.
But this is becoming increasingly common among property investors, and is one of the reasons why more Australians are starting self-managed superannuation funds – including a rising number of people aged under 40.
SMSFs are a legal way to avoid paying hundreds of thousands of dollars in capital gains tax, but industry experts warn people to beware of property spruikers operating in this space.
New data from the Australian Taxation Office shows SMSF member numbers have grown at their fastest rate in five years, with 43,000 more people signing up in 2020-21 to take the total past 1.11 million.
SMSFs require more work than many super fund members are comfortable with, but offer more choice, control and potentially huge tax benefits.
Let’s crunch the numbers. If a median-priced property of $667,000 is bought by a typical investor and sold a decade later for double the value, their capital gains tax can be $157,000. If it eventually doubles again in value, the tax bill climbs above $300,000.
But if that property is held in a SMSF member in retirement, Australia’s superannuation rules cut the CGT to zero after age 60.
These generous tax rules also apply for shares, cryptocurrencies and other investments.
SMSF Association CEO John Maroney says self-managed super funds can now have six members, following rule changes in July, and can become a lifetime family savings vehicle.
Business owners are big users of SMSFs, but Maroney says “it’s got to be part of your strategy, not just because other small businesses or friends at a barbecue are doing it”.
He says renewed interest in SMSFs reflects greater interest in super since Covid hit, and younger people having bigger super balances thanks to years of compulsory employer contributions.
“It’s the cheapest option once you get to a certain size,” he says.
The SMSF Association says combined assets of $200,000 can make running costs comparable with other forms of super, while others say balances above $500,000 are preferred.
You can borrow money within a SMSF to invest in real estate, but beware of property spruikers who overemphasise the benefits of this.
“We encourage people to get professional advice from someone who doesn’t have a financial interest in selling the property,” Maroney says.
“You would need to think carefully about setting up a self-managed super fund just to finance the property side.”
SMSF Loan Experts managing director Yannick Ieko says the costs of borrowing within super to buy property have been dropping, and he is seeing more people aged under 40 set up SMSFs.
“You have the freedom to manage things yourself or appoint a professional to assist you,” he says.
“You have complete control over your own super.”
Big banks stopped providing SMSF loans in 2018, but current lenders include Bank of Queensland, La Trobe Financial and Reduce Home Loans, with rates as low as 3.6 per cent.
Paul Dugdale, 39, and wife Kat, 36, set up their SMSF for several years ago to invest in residential and commercial real estate.
“Our annual concessional super contributions, together with the incoming rent from tenants, means that our mortgages can be reduced at a rapid rate and our properties are cashflow positive,” Dugdale says.
“We can also invest in shares and other assets to diversify our portfolio risk.
“Running a SMSF certainly takes more time and effort than an industry super fund and SMSFs definitely aren’t for everyone.”
SMSF Pros and Cons
• Control where your money is invested.
• Ability to invest in property directly.
• Lower costs when SMSF expenses are spread over bigger balances.
• Lower taxes while saving, and no tax in retirement.
• Can borrow to invest.
• Managing a SMSF can be time-consuming.
• A high level of financial literacy is required.
• Auditing, insurance and other costs must be managed.
• No government protection if money is lost through fraud or theft.
• Complexities around maintaining or selling property.