Investing in real estate and superannuation represent two primary investment approaches for Australians. While many individuals view property and superannuation as separate investment opportunities, they can be combined.
You can buy an investment property inside super, but only if you have (SMSF), your own self-managed super fund, As the name suggests, an SMSF is a fund that you manage yourself. One of the benefits of setting up a self-managed super fund is that you have total control over what assets you are investing in, provided you comply with Australia’s superannuation laws. To buy an investment property with SMSF, there are certain conditions that must be met:
– The property must be acquired exclusively for the purpose of funding your retirement, a requirement known as the sole purpose test.
– It should not be purchased from a closely connected entity.
– Neither you nor any related party can reside in the property.
– The Residential property cannot be leased to yourself or your family members. However, you can lease commercial property back to yourself or a relative for business use, provided the lease payments reflect current market rates.
All earnings, including income generated from SMSF property, are subject to a tax rate of just 15%. In contrast, individuals with an average income in Australia are taxed at a marginal rate of 32.5%, while the highest earners in the country face a marginal rate of 45%.
This means that if you continue to earn other taxable income, you will pay significantly lower taxes when you invest in property within your SMSF. The greater your earnings, the more tax savings you can enjoy.
SMSFs in Australia can have up to six members, if your fund consists of two or more members, you have the option to combine your resources to acquire more valuable, higher-quality properties. This can provide you with the chance to enhance both your rental property income and capital growth potential.
As long as you maintain ownership of your SMSF property for a minimum of 12 months, you will be entitled to a 33% CGT discount on any profit you make when you sell the property. This means you will only pay 10% tax on your selling profit, rather than 15%.
Borrowing to invest enables you to potentially access assets that were previously beyond your financial reach. This opens up the possibility of acquiring superior investments and potentially earning returns on a larger scale.
for the sake of simplicity, let’s ignore compound interest, if you invest $200,000 and earn a return of 10%, you will have earned $20,000. If you borrow $2 million to invest and earn the same rate of 10%, you will have earned $200,000 — ten times the amount had you not borrowed to invest. We haven’t taken into account time, compound interest or the costs of borrowing, but you get the idea.
If you borrow to invest in property with an SMSF loan, it must be under the terms of a (LBRA), also known as a limited recourse borrowing arrangement. This arrangement will have the following terms:
An LRBA limits the lender’s right to repossess and sell only that asset if you default on your repayments. They will not be able to repossess any other assets in your SMSF.
you can secure SMSF loans for up to 80% of a property’s value.
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