Residential & Commercial Property Purchases
Two illustrative scenarios showing how SMSF trustees can use a limited recourse borrowing arrangement to purchase property through their Super Fund.
General advice disclaimer: the scenarios below are illustrative only and are provided as general information. They are not financial, legal or taxation advice, and do not take into account your objectives, financial situation or needs. Seek professional financial, legal and taxation advice before borrowing or purchasing property through your SMSF.
Residential Property Purchase
Peter is 45 years old and has been thinking about purchasing an investment property for around $450,000. He recently became aware of the changes to the borrowing rules that now permit Super Funds to invest in residential property, and so he decided to investigate further.
He met with his financial planner, who recommended he weigh up the alternative strategies of a "normal" negatively geared investment or setting up a Super Fund to purchase the investment.
Peter concluded that it would be a great way to generate wealth for his retirement by using his Super Fund to pay the deposit and any other purchasing costs, i.e. stamp duty, bank fees etc.
"He was astonished to find that, by utilising a Super Fund to purchase the residential investment property, the total projected Capital Gains Tax savings alone on selling the property at age 65 would amount to $180,416."
Assumptions: purchase price $450,000; property value increases by 5% pa; marginal tax rate of 38%; current taxation and SMSF laws remain unchanged.
Commercial Property Purchase
Bob is 62 years old and runs a successful hardware store from a building he bought in 1992 and has now fully paid off. Bob wants to retire and let his son James take over the business. But James can't get a loan to buy the property because, at a value of $1M, like most people his age James doesn't have enough deposit.
Bob, his wife and James have a Super Fund with total assets of $500K. In discussions with his Accountant, Bob learns that his super fund can acquire the property using a super fund loan.
The family's super fund invests in the property by taking out a $650K loan, and the Super Fund uses its existing funds for the $350K deposit and other transaction costs. Bob and his wife receive $1M, which they use to top up their super and produce a retirement income stream.
No CGT is payable, as the sale was exempt under the small business retirement provisions. Bob and his wife each get a tax deduction for up to $50K of the super contribution and can receive up to $85K p.a. tax-free income.
"James' business pays the same tax deductible rent as previously, except now the $75K p.a. goes to the super fund."
Bob doesn't have to worry about selling the business or premises to an outsider, and James doesn't have to worry about being evicted or suffering 'unfair' rent increases.
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