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News Bulletin : ADA News Bulletin December 2010
30 DECEMBER 2010 Compiled by Michael Lannon investment insight www.2020directinvest.com.au/ada | 1800 352 021 100% entry fee rebate on managed funds Following the latest rise in interest rates there has been a great deal of commentary on whether the Australian property market is overvalued. However, many commentators argue that there is no great risk of a property slump as there is still a huge supply/ demand imbalance. Whatever the answer one thing is certain and that is the Australian love affair with property continues and recently a new type of buyer has emerged -- self managed super funds (SMSF). Most investors buy an investment property in their own name or jointly with a spouse or partner. An alternative that has become available in recent years is to acquire property investments through a self-managed superannuation fund. Superannuation is a concessionally taxed environment. In particular, SMSF's provide investors with control and legitimate tax benefits for retirement savings. SMSF property investments can include most forms of property including business premises, such as a dental practice occupied by a SMSF member. New rules governing SMSF borrowings (Sections 67A and 67B of the SIS Act) came into place on 6 July 2010. These allow the purchases of investment property to be funded via the use of a limited recourse borrowing arrangement. Like gearing outside super, borrowing to invest can allow a fund to increase its investment assets and to maximize potential returns. This can help to build up superannuation savings more quickly, which for many is desirable given the limitations imposed by the super contribution caps. Borrowing within a SMSF is a legitimate means by which accumulated super benefits can effectively be used as a deposit to acquire business premises provided the sole purpose of the acquisition is to build retirement savings. Importantly, buying investment property through a SMSF can also save considerable tax. Lease payments from a SMSF member's business to their SMSF that owns their business premises are also tax deductible to the business and will help to build up retirement assets. HOW SMSF'S CAN HELP PROPERTY INVESTORS SAVE TAX Using a SMSF to acquire investment property can legitimately reduce tax in three main ways: USING SALARY SACRIFICE TO FUND DEBT REPAYMENTS Most investors borrow to help fund the cost of a property purchase and, in some cases, to gain a tax deduction if the property is negatively geared. Repayments are generally funded from after tax income. However, in a SMSF the ability to pay off debt borrowed to acquire a property using salary sacrifice or personal super contributions is beneficial to anyone on a personal marginal tax rate above 15%. When you compare the costs of borrowing outside super with borrowing inside super, being able to salary sacrifice into super rather than repay the loan with after tax dollars can produce a better result by allowing you to pay off debt sooner and save on interest costs. MINIMIZING TAX ON RENTAL INCOME Superannuation funds pay a maximum of 15% tax on income (such as rent) which is considerably lower than many individuals' personal marginal tax rate. Better still the tax on income reduces to 0% on the SMSF's member's share of assets when being used to pay a pension. However, the flip side of this 0% tax rate is that expenses are not tax deductible if the property is negatively geared. Tax payable on income derived from an investment property depends, of course, on the income after deductible expenses, including interest. Properties can be positively (income exceeds deductible expenses), neutrally (income equals expenses) or negatively (income is less than expenses) geared; thus the tax payable (or the amount that can be offset against other income so as to reduce tax) varies widely. Most investment properties will BUYING AN INVESTMENT property through a self-managed super fund
ADA News Bulletin November 2010
ADA News Bulletin February 2011