If you have a self manage super fund you maybe seriously considering investing in real estate to make of the most of recent tax changes rather than navigating your way to turbulent share markets. Since 2007 self-managed funds had been able to borrow to invest in property but the ATO recently clarify the number of roles relating to SMSFs making real estate an even more attractive proposition.
Peter Burgess, Technical director of SMSF Professionals Association of Australia, says the ATO's moving a positive one for do-it-yourself funds.
Burgess: There are significant benefits in social release over arrangement so, cause what where doing here is combining the benefits of tax concessions in super so you know we normally associate a low rate of tax in a superannuation fund so any rental income that fund is receiving from the property is taxed at a low rate of tax, a maximum rate of 15 percent and can actually be no tax if it's in the pension phase and of course capital gains are also a tax at a low rate as well. So what were doing here is combining the tax concession of super with the benefits of leverage gearing and when you put those two things together you get some very powerful wealth creation strategy, so its not surprising. Its a lot of excitement, a lot of hype around this type of arrangements.
But he warns investors need to be aware of the risks before diving in.
Burgess: We are trying to build a property portfolio, that could be quite difficult because you can't use the any equity that you build up in a self-managed super fund to do that. And also if it's a negatively geared property, you can't use the any of the tax losses in your own name that they are quarantined within the fund itself. The service and risk associated with the arrangement as far as getting it right , or the documentation needs to be spot on. It needs to be a limited recourse loan. And the assets that purchased within these arrangements needs to be held on trust in a separate security trust if you like so its not for the faint hearted. They are quite complex and can be quite costly.
So is property a safer bet for your super then stocks for instance. Brett Abikhair, Financial Planner for the The Selector Group says the trick is to diversify your investments and think long term.
Abikhair: It is property a better class than everything else in a world. Its a...the answer has to be, its a long term investment strategy super. Therefore all asset classes is actually playing a role in your super fund. For example back in the late 80s, you had cash returns of 17-19 percent that looks like a great return today but it wasn't when you're giving 20s and 30s in other asset classes so I think for a long term strategy is a biggest challenge today in this industry is getting clients to diversify if they want to head down that path of property.
But what if your nearing retirement, Brett Abikhair says consult your financial planner.
So with that ability recently people in their late 50s going to buy an investment properties in their super. Then when their stock markets tanked by 20 percent in the last 4 or 5 months, its a challenge to try to get them to look outside the square. That whole line where you say to a client: “Well, you can't sell the back shed of your house to help fund your retirement” actually starts to make sense to a potential retiree. So I’m no saying that they shouldn’t be going into it but I'm simply saying that they need to be careful in their decision.
Tony Hayek, CEO of Blue Wealth Property, says investing in property through your self-manage super fund is proving popular particularly by disillusioned by super funds dwindling returns.
Hayek: I think the ground swell of interest in SMSF has been around now for a good couple of years. There's a perception in the market place that its too complex for average mum and dad. I think that's absurd. I think that average Aussies [are] sick of seeing 2 percent 3 percent returns over rolling 7 ten-year periods in manage funds or the share market. So property is an asset Aussies love and SMSF has been their really interested in.
And If you want to find out how much you can borrow, use our SMSF calculator. This is Donna Sawyer reporting for your Investment Property.