Grow Your Self-Managed Super Fund (SMSF) With Property Purchasing

Traditionally, SMSFs grow their funds through a variety of investment strategies like shares, term deposits, managed investment schemes, derivatives, collectibles and more. Investing in property was a less popular choice due to the large amount of funds required to purchase one. Since 2007 however, superannuation laws in Australia have allowed SMSFs to borrow money to invest in property, making property investment yet another viable option for growing a SMSF.

If you’re looking to grow your SMSF, here’s why you should consider purchasing property:

  • Possibility of generating high returns, thus maximising your retirement income.
  • Minimum taxation on the rental income that the SMSF property earns.
  • Not affecting your personal savings since the cost of purchasing the property and maintaining it are borne out of the SMSF.
  • Interest paid on loans, insurance, maintenance and other expenses related to the property are eligible for tax deduction. This will considerably bring down the tax you owe on your SMSF earnings each year.
  • Availing a discount on the capital gains tax if you happen to sell the property before your retirement, and if the property is sold when in retirement, no capital gains tax is applied.

Residential, commercial and industrial property can be purchased through a SMSF however must pass the ‘sole purpose’ test – meaning the property should have been bought solely for providing retirement income to the SMSF members. Purchase of the property should not directly benefit the trustees or people related to them in any way so trustees cannot live in nor rent the property to fund members or any other person related. The only exception to this is a SMSF member can purchase a property that their business operates out of and pays rent to the SMSF at current market rates.

What if your SMSF does not have sufficient funds to buy property?

You can use a Limited Recourse Borrowing Arrangement (LRBA) to fund the purchase. A LRBA is a type of loan where a SMSF trustee takes a loan from a third party lender to fund purchase of a single asset. The asset, in this case the property, will be held in a separate trust from your other SMSF investments. In case of loan default, the lender can only use the property purchased via the loan and any other security offered against the loan to recover the loan value. The other SMSF assets and investments will not be at risk.

Ideally, SMSFs should have a sizeable fund value before investing in property. While this is a good investment option, you may still want to have a diversified portfolio so as to minimise your risks. Also, consult professional help if you have decided to invest in property to ensure you are not putting your SMSF at any unnecessary risks. Remember that any non-compliance can invite a high penalty, leading to substantial loss of your fund money.

When done right, property investment can be a great way to maximise your retirement benefits. If you are considering making a property investment through your SMSF and want to know the dos and don’ts regarding property investment in SMSFs so that you are never at risk of being non-compliant, let us know and we’ll be more than happy to guide you through.

Looking To Retire With An SMSF? What You Should Know Before Moving Into One

A Self-Managed Super Fund (SMSF) is a legal tax structure regulated by the Australian Taxation Office (ATO) that allows people to control and manage their retirement savings. Individuals are responsible for managing the fund and investing it appropriately while ensuring compliance to tax laws and super fund regulations. The increase in popularity of SMSFs came after the 2006 announcement of tax-free super for senior citizens, and today, there are nearly 600,000 registered SMSFs in the country.

An individual SMSF requires one to four members who are all trustees. If you’re deciding on whether SMSFs may be the right choice for you, consider the following features and benefits:

  • Control and flexibility – This is one of the best features of running and managing SMSFs as it gives you control over your fund’s investments, and flexibility to invest in a variety of assets such as direct property, shares, term deposits, and collectibles. You also have the flexibility to switch or modify investments when needed.
  • Concessional tax rates – While investment income tax is capped at 15% during the accumulation phase, the pension phase has no tax payable at all, even for capital gains. Well thought out tax strategies will, in fact, help cut tax payments and grow super savings.
  • Capped costs of running an SMSF – This means your costs would not go up as the super balance grows. Your account balance would increase over the years but your costs will remain the same, making SMSFs a cost effective fund to manage.
  • Continuity of fund – It’s also important to note that the fund can continue at the event of the death of a trustee/member. His/her spouse and children can benefit from the fund.

Before making your decision to move into one however, consider also these other points:

  • The sole purpose of an SMSF should be to invest money to provide a substantial retirement income for its members. Investors must note that even though an SMSF gives you access to your super, it is illegal to use the money for any purpose other than investing it in an appropriate channel.
  • As with anything, you reap the rewards of your efforts so you must be prepared to commit some time and effort into managing an SMSF. As mentioned earlier, an SMSF is eligible for tax concessions; but in order to avail these concessions, the SMSF needs to be set up correctly, which would take time.
  • When the SMSF is up and running, you may want to consult an accountant periodically to ensure all records are in order, to review the performance of your SMSF, and seek guidance on tax minimisation.

Given the above considerations, many might then question whether it would be advisable to engage professional help in setting up and managing the SMSF. As is the case with any complicated super fund, it would make a lot of sense to consult and take help from experts to set up and manage an SMSF as well. This is because the entire process from decision making about choice of investments, the actual setting up and managing, and even being aware of the rules and legalities along the way can seem overwhelming to any individual investor.

With professional help such as our SMSF specialists at Superior Accounting Group, you can rest easy knowing that someone will be there to help you at every step along the way. This way, you enjoy the benefits of an SMSF going into retirement without needing to go through any additional stress and effort.

Planning Your Taxes In April Will Help Avoid Nasty Surprises

It’s a couple more months before you need to lodge your taxes again. While there’s still time before you need to get into tax planning, you might want to consider getting ahead of your taxes through pre-emptive tax planning so that when the time to lodge arrives, you are not in for a nasty surprise.

If you have had a steady income over the past year with no new investments or sources of income, then there is likely to be little change in your tax liability. However, if you have had changes in the past year affecting your income such as starting a new business, or perhaps earning rental income through investment in a new property – your tax calculation for this year may vary significantly from the previous year. Factoring these in, you may find yourself owing a sizeable amount of taxes you are not financially prepared for.

Other reasons why you should get an early start on tax planning 

  • Not only will you be financially prepared for it when the time comes, it will also ensure a smooth tax filing process.
  • If you know beforehand what you might owe, you can take steps to keep aside money to meet your taxes instead of dipping into your savings.
  • You can take appropriate steps to avail tax deductions like making contributions to charity, performing repairs on your rental property or prepaying interest on mortgages and other tax deductible loans to reduce your tax burden. Business owners can consider pre-paying superannuation for their staff to avail deduction this financial year.
  • You can check to see if you are able to write off bad debts to claim a tax deduction or are eligible for deduction on a portion of the cost of your business assets.
  • You avoid the stress of having to get all necessary documentation in order, in time.
  • Regular tax planning will cultivate financial discipline as it inculcates the habit of making sound financial decisions throughout the year and not just during the tax season.
  • For the business owner, it’s the time for you to reflect upon your business structure and assess the financial viability of your business in terms of cash inflows, cash outflows, surplus cash reserves, net profit etc

By planning early, you also have the opportunity to ensure that your taxes are filed correctly. The complexity of lodging taxes has left even large corporations finding themselves owing tax to the government due to ignorance or wrongful interpretation of tax laws sometimes. One case in point is Qantas, which was asked to pay $34 million additional tax due to GST on non-refundable airline tickets where the passengers did not show up for their flight.

Qantas’s argument that GST did not apply to cases where there was no flight was dismissed by the High Court on the grounds that even if the passenger did not travel, there was a promise of flight and its associated services, which Qantas made to the passenger in return for money. Just imagine the hassle and costs avoided if only Qantas had prepared their taxes early.

So, while you get started with your early tax planning, here are a few tips that would help you be more prepared for your next round of tax lodging:

  • Keep all necessary documents including relevant bills and receipts in order and organise your paperwork beforehand.
  • Consult your accountant to see what deductions and tax write-offs you may be eligible for.
  • Keep abreast of changes and additions to tax laws. Ask your accountant about how they may affect you.
  • Discuss tax minimisation strategies with your accountant upfront and implement them within the financial year.
  • Pay your expenses like superannuation payments for employees, interests to SMSF trustees, insurance payments etc. within the financial year and delay income sources to reduce tax for the current year.

For the business owner or property investor, filing taxes may be more strenuous given that you have more numbers to manage. This is where having an experienced accountant come in to assist with your tax planning help greatly while you focus on your business. At Superior Accounting Group, we will guide you to get your records up to date and advise you on applicable tax deductions so that you can minimise your tax liability. Get started on your tax planning today.