How to pay less tax on your property investment

By David Servi

With a little expertise and a bit of paperwork, private investors can put their money into Sydney’s usually hugely-profitable property market while at the same time reducing their tax burden and planning for retirement.

How? With self-managed super funds. More than one million Australians are now trustees of about 600,000 self-managed super funds nationwide, indicating that huge numbers of people have concluded that the advantages of these funds outweigh the potential problems.

Naturally, like everything in life, there are complications lurking below the surface of this type of bricks-and-mortar investment. Here at Spencer & Servi, we understand that SMSFs can potentially deliver big tax benefits. On the other hand, we know that investors should be aware there are reasonably substantial SMSF set-up fees and on-going costs, and potentially big dramas with the tax department if the fund is mismanaged or departs from its stated strategy.

The tax office imposes strict SMSF rules. The SMSF investment must be for the sole purpose of saving for retirement - which means this type of super fund cannot be used pay off your own home or buy a holiday home, for example. An SMSF property investment has to be kept at “arm’s length” – so it can only be let to tenants at market rates, not at discounted rates to a relative.

The Australian Securities and Investment Commission warns that, in general, the costs of self-managed super funds can be high, and funds of at least $200,000 are usually needed to make it worthwhile.

Unavoidable costs include an annual SMSF supervisory levy of $259, collected by the Australian Taxation Office; the costs involved in producing an annual financial statement and tax return for the fund; fees for annual independent audits of the fund’s assets; and the costs connected with setting up the SMSF, including the cost of a trust deed (which requires a lawyer’s input).

Unless you are financially savvy and on top of all the paperwork required, other costs might include paying someone to keep the books and manage the administration of the fund.

Borrowing money for an SMSF property investment can also be more difficult than borrowing as a private individual. These days, providing certain conditions are met, an SMSF can borrow to invest in property under a Limited Recourse Borrowing Arrangement (LRBA). The tax office warns, though, that such a loan can be complicated and potentially troublesome, and suggests anyone interested in signing up for an LRBA loan seeks expert advice from a qualified and licensed professional.

On the plus side, SMSFs can use negative gearing to claim a deduction for borrowing expenses, and rental income paid to your SMSF is generally taxed at a maximum of 15 per cent, rather than being lumped in with your overall income as is the case with returns from individual property investments.

If you start a retirement phase pension in your SMSF, then the rent you receive is tax-free. More importantly, after starting a retirement phase pension in your SMSF, any capital gain realised by selling the property is also tax-free.

We recommend you get expert advice on the potential advantages and disadvantages of jumping into the increasingly popular world of self-managed super funds, while remembering that if the fund is well-organised and well-resourced it can potentially save the smart investor a lot of money.

Here at Spencer & Servi we can offer assistance to anyone interested in finding out more about self-managed super funds.

The information contained in this blog is not intended to be advice, it is for information purposes only. It has been prepared without taking into account any individual’s objectives, financial situation or needs. Before any person acts on any information in this document they should consider the appropriateness of the information, having regard to their objectives, financial situation and needs. Before making any decision about whether to acquire a product, individuals should seek professional advice from their licensed adviser.