Borrowing within your SMSF to purchase property is a strategy that has become a very popular way to boost your investment and achieve your retirement goal. With up to a third of SMSF strategies using gearing, the recent ATO draft rulings are set to make the strategy even more appealing.

Given the recent fall in the property market, now is a good time to develop a long term accumulation strategy that incorporates gearing to help maximise your potential returns.

By combining the advantages of negative gearing in a low tax environment, there are clear tax benefits to invest in property with your superannuation money.  These benefits include:

• Tax savings now – by salary sacrificing into super you will reduce your current tax bill.
• Tax savings in the future – reduce your capital gains tax liability to 10% and even 0%.
• Diversification – with more money to invest, you can buy assets you otherwise couldn’t afford.
• Limited risk – legally, the loan from the bank must be “limited recourse,” this means that the bank only has rights against the assets purchased with the borrowed money, not your other super or personal assets.
• Super charge your super – gearing allows you to grow your super assets at a much faster rate.

The greatest tax benefit associated with gearing within your SMSF is the potential for capital gains tax concession on capital growth. If an investment property is sold while in accumulation phase, after being held for more than 12 months, a 10% tax rate applies. But if this same property is sold after the super fund has converted to a pension phase, no tax will apply.

Another great advantage is that even if the property is positively geared, investment income will not be taxed in pension phase, and a flat rate of 15% if in accumulation phase. This is very favourable considering outside a super fund income can be taxed up to 46.5% for an individual. 

Gearing in superannuation is not only beneficial for tax reasons; it can also bring forward property ownership. For example, instead of acquiring a $600,000 property at age 60, the same property could be acquired with $300,000 superannuation money and $300,000 borrowings at age 45. 

The tax advantages of borrowing within your SMSF can ensure you have a tax-free property in retirement.

Contact Janet, janetward@kmwaccountants.com for an obligation free meeting on how to start your own SMSF to purchase property.