Learn how you can pay little or no tax, pay off your loan in half the time and save hundreds of thousands of dollars in interest charges and pay little or no stamp duty on commercial properties purchased through an SMSF.
What are the 3 most common issues with buying an investment property?
- Savings to fund a deposit;
- Security to borrow again; and
- Servicing an investment property using personal income.
Capital Gains Tax
One of the biggest costs associated with selling an investment that has appreciated in value, is capital gains tax (CGT). When investing in your own name, assuming you hold the investment for 12 months or more, 50% of the gain is taxed at your marginal rates. However, when investing in super, the CGT payable depends on when the asset is sold. If sold during accumulation, the CGT is 10%. However, if sold when the super fund is paying a pension, the CGT is 0%. That’s right, NIL.
Let’s look at the following case study:
Property Purchased for $400,000 sold for $800,000 15 years later
|Selling property after 15 years
|SMSF – No Pension
SMSF – Pension
|Less CGT Discount||$200,000||$133,333||$0|
|Capital Gains Tax||$93,000||$40,000||$0|
|Net gain after tax||$307,000||$360,000||$400,000|
- Couple earns $120,000 and owns their own home and are aged 55
- The husband is the sole owner of property
- CGT Calculation method – 50% discount method
- We have assumed that the property has doubled in value for illustration purposes only.
Pay off a property loan in half the time
Let’s look at how you can pay less interest on a loan for a SMSF property.
The loan repayment illustration below shows you the following:
Loan amount $360,000
Interest rate 7% principal and interest
Loan Term 30 years
Extra SG payment $630
Interest saved $229,133.05
Time saved 12 years 4 months
By using your super to fund the deposit and stamp duty and combining the employer 9% contributions, this couple was able to make additional monthly payments of $630.
Let’s break down the numbers so that you can see where this money comes from.
With a combined salary of $120,000, the combined employer 9% contribution each year is $10,800 ($120,000 * 9%). After taking into account the 15% contribution tax, the combined net contribution is $9,180 or $765 per month.
So their saving is the following:
- Interest saved: $229,133; and
- Time saved: 12.4 years.
Pay Little or No Stamp Duty
How? Again the superannuation laws allow business owners to sell their existing business premise or building to the super fund and depending on the state you reside in you can pay no tax or as little as $50.
If you buy or sell your business premises to your SMSF, you will pay:
- NSW $50 stamp duty;
- VIC $0 stamp duty;
- WA $20 stamp duty;
- QLD $20 duty transfer *subject to application and approval
(Source: Office of State Revenue in each state – 29 March 2011)
The provisions of the duties legislation of each State or Territory differ.
Increase your retirement savings by buying property
One of the less publicized facts about gearing a property in a SMSF is that in fact, it does not fall within the superannuation contribution caps. Following is a summary of the caps:
Concessional Contributions (taxed at 15%)
This includes the employer 9% contributions or any salary sacrifice amounts you make to super. Concessional contributions are taxed at 15%.
The Government is currently proposing changes to the contribution limits and we will advise once this has been finalised.
Non-concessional contributions (0% tax)
Non-concessional contributions are after tax contributions and are not taxed. The age of the member determines the level of non-concessional contributions.
Up to age 64; $150,000 a year or $450,000 over a 3 year period. For example, you can make a $450,000 NCC in the 2012/13 year but you cannot make another NCC until the 2015/16 year.
Age 65 – 74; $150,000 a year however you must work for at least 40 hours in 30 consecutive days prior to NCC being made.
There are several reasons why you would purchase a property in your super fund instead of your own name:
- You can use your super to pay the deposit and stamp duty
- The rent received from the property along with your employer 9% contributions to repay the debt instead of your after tax money
- Capital gains will be taxed at either 0% or 10%, depending on when you sell the property, compared to your marginal rates if the property was purchased in your own name.
To discuss your circumstances, please contact Luke on email@example.com or 02 8536 4444.