Property in SMSFs, is that really the best option?

SMSF property

Happy to lead you through the pros and cons of property in Self Managed Super Funds (SMSFs).

Appropriate I use that expression “cons” as it is potentially being used by “property sales people” to try to flog their latest offerings in a quiet market place.

What they won’t tell you!:

The only real justification I’ve heard around the traps is to try to minimize Capital Gains Tax (CGT), IF, there is an increase in value of the property you purchase (the ATO/Govt is currently looking at in some way closing a perceived loophole with super pensions here);

The issues:

  • Requires a separate SMSF, the compliance for which you are personally liable and accountable for as Trustees, (Establishment, say $600, plus normally a corporate trustee of about $800, ongoing compliance costs, say $1,500 – $2,500 pa.) that is without any administration service for the super fund being provided, and no initial or ongoing professional advice, (as true “Advisers” would receive $0 from any of the costs mentioned above or below).
  • Requires a separate “warrant trust” to be established to coordinate the securing of a (more restrictive than normal) loan, say $1,500-$2,000 establishment cost.
  • If the loan is sourced directly from a bank, you will part with up to another $2,000 – $5,000 on average, for them to convince themselves of the viability of the structure/loan, or if you borrow against your own existing equity and “on-lend” to your SMSF, ie not using the new property as security, then perhaps just $500-$1,000 to set up/conveyance etc.

But one more obvious question is: “Why property”?, particularly when Australian residential property was recently rated as some of the “most expensive in the world”.

With buying costs and sales margins, particularly for many of the syndicated-sales-spiel “new developments”, most if not all Capital Gains in the first 2 – 5 years could be lost/offset.

Don’t get me wrong, (I’ve set up an SMSF to test the system and there is no magic about it, just costs and no support) I’m happy with the concept for the right property, particularly for a business owner’s premises, but I feel real and sustained growth in the property sector could still be challenging. Also, I still can’t see the value in the potential CGT savings, when you compare it to the significant upfront and annually recurring costs, the potential for the CGT advantage to be knocked on the head by a broke government, and provided you eventually sell in retirement, when your tax rate is lower, much of the CGT implications may be substantially mitigated by the right strategies and good tax planning.

By the way, it is not often emphasised that you need to be prepared to sacrifice potential tax deductions (negative gearing) at your tax rate, say 39% or 47% and accept the lessor advantage of a super funds moribund 15% tax advantage, further bringing the “costs” of the structure into question compared to the potential benefits.

Even if you choose to proceed, the quality and prospects for growth in the property should of paramount concern, to that end, why do it through super?

With the misinformation out there I must run a session on this!!!

Happy to discuss.

Cheers, and if you know of a family member or friend we can assist, please don’t hesitate to share with them.
Dave Dyson

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