Investing in property developments has served many people very well. Financially, many have achieved strong rental income and reasonable capital appreciation on their property, whether it be the development of apartments, offices, shops or warehouses.
An increasing source of funding for property developers will come from self-managed superannuation funds. Australian Tax Office statistics in September, 2008, reported that direct property accounted for only 13 per cent of all assets held in self-managed super funds. However, with some investors feeling secure and comfortable with the prospects of property returns, while uncertain about the prospects of domestic and global sharemarkets, interest in additional investment into property directly within superannuation has increased.
Super fund members are also seeking more control over their retirement funds, and self-managed super funds are being set up with the intention of direct property acquisition. And superannuation legislation has recently been amended, detailing and supporting the circumstances around which a super fund can borrow to acquire property assets.
On the basis that there is sufficient capital within a self-managed super fund to acquire property, that the trust deed of the fund permits the acquisition, that it adheres to the documented investment strategy of the fund and that it is not used for personal or related party use, it is feasible for self-managed super funds to invest in a property development. Borrowing to acquire property that is being developed is a little more restrictive due to financial institution lending requirements.
Why would you consider superannuation capital to invest in property? Tax benefits. The tax laws relating to superannuation provide concessions and benefits on investment rental income, capital gains and in retirement. Rental income is taxed at 15 per cent, capital gains on property sold in accumulation phase can be taxed between 10 and 15 per cent, while property acquired in accumulation phase and sold in pension phase can pay no capital gains tax.
And a self-managed super fund in retirement in pension phase can receive rental income tax-free, not pay any capital gains tax and have income distributed out of the fund tax-free. No other investment structures are as generous with taxation implications as superannuation.
These tax concessions exist irrespective of the investment or asset, so it is important that research is undertaken on the property to ensure a strong financial outcome.
The downside of direct property investment within superannuation is that it is generally an illiquid investment, which may restrict future required pension payments, and also usually results in reduced investment diversification and therefore reliance on one single asset to meet retirement financial objectives.
If you run or intend to run a business out of business real property, it may be advantageous to explore the potential of acquiring the commercial or industrial property with superannuation and have the super fund lease the property to your business. The Australian Taxation Office defines business real property as a freehold or leasehold interest in real property or an interest in Crown land that can be assigned or transferred.
Business real property needs to satisfy a business-use test that requires real property to be used “wholly or exclusively in one or more businesses”. So, provided the above definitions are met, it may be financially smarter for your business to pay rent to your superfund than to an unrelated third party.
Superannuation planning needs to be done before acquiring developed or developing property. Seek financial advice and property-specific advice. Understand your potential to utilise superannuation entitlements for property investing and assess its investment merit.
Adam Watts is the authorised representative of Financial Wisdom
adam@yourlifetime.com.au
If interested in learning more about this update please contact me today!
Tags: accumulation phase, capital, capital gains on property, cent, development, property, property assets, self managed super fund, self managed superannuation funds, Tax
 |
As Domain Property Advocates continues to grow I will continue to provide superior service to those choosing to use property as their investment. It is an important choice of who to choose as the one responsible to look after your property. You can be sure that Domain Property Advocates will always strive to be the best. |  |
