Martin Jandera of Super Property Concierge answers some questions about buying property through superannuation.
Q: I want to use my superannuation savings to invest in property, but I recently came across a Taxpayer Alert from the ATO (2012/7) which really scared me. Is it still safe to borrow money in super to buy property?
A: Borrowing money to buy property in super can be a sound and particularly powerful strategy so long as it is well considered, appropriately implemented and aligned with the investment strategy of your fund.
As a Taxpayer Alert is essentially designed by the Australian Taxation Office (ATO) as an ‘early warning’ to taxpayers on issues or arrangements it has under close scrutiny, it should serve as an important informational and educational tool when deciding whether or not to proceed with the strategy being watched carefully by the ATO.
In fact the alert you found makes for a very useful tool, highlighting the considerations you should make before proceeding with the intended strategy and the mistakes you should be careful not to make to ensure your own successful implementation of the super borrowing strategy.
Better still, you can also use this alert to assess the competency of the professionals you may engage to assist you review, develop and implement this same strategy.
To allay your fears however, the alert seeks to reinforce the following:
Be absolutely sure that a self-managed super fund is appropriate for your needs, research your duties, responsibilities and legal obligations yourself or through an appropriately qualified adviser
Carefully review the appropriateness of the super property borrowing strategy for your fund and its alignment with your fund’s investment strategy
Ensure you understand and correctly implement the necessary associated structures and processes of the super property borrowing strategy and ensure their compliance with the relevant laws
The quality of the underlying property is crucial for success. Be sure you understand comprehensively how the prospective property is expected to meet your fund’s investment objectives.
Quality research and/or advice is the only way to ensure the successful implementation of the super property borrowing strategy and one of the best ways to avoid the many penalties that may be imposed as outlined in the same Taxpayer Alert. Rather than being fearful of the Alert, use it to avoid the costly pitfalls and ensure any successful outcomes are not shared with the ATO.
Q I’m an active investor already with a growing (somewhat balanced) portfolio of five properties, but am interested in looking at investing now through my SMSF. Should I be looking mainly for capital gain or cash flow with my first SMSF property?
A: To answer this common question, as with any SMSF investment question, we need to firstly consider the fund’s investment strategy, one established by you, the Trustee.
To determine whether or not your fund should be looking for capital gain or cash flow will very much depend on the financial objectives of your fund, which in essence should reflect your own financial objectives, given that you are both the trustee and fund member.
Where an individual is seeking to accumulate funds for retirement a general investment approach is usually dominated by a capital growth strategy whereas members looking to sustain their member balances in retirement will generally prefer cash flow strategies.
The inherent benefits of a gearing strategy as in the super property borrowing strategy may be more pronounced where a capital appreciating property is used. These gains may be more effectively received if crystalised at some point in the payment or pension phase, when a zero tax rate may apply.
Cash flow is certainly important in ensuring an investment remains affordable and therefore cannot be overlooked and will certainly come into its own in the pension phase.
Effectively though, the question of capital gain or cash flow will come down to the investment strategy of the fund which will be influenced by the member’s own financial goals and objectives.
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