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Property is gaining in popularity in SMSFs

Tax advantage factor in super property investment

Self-managed superannuation funds are gaining popularity as more people seek control over the investments they hold in the compulsory retirement savings system.

At the end of December, 1,034,497 people had an SMSF, up from 983,982 at the same time a year earlier, the Australian Taxation Office reports.

These funds held a total of $568 billion in investments, of which more than $21 billion was invested in direct residential property. Almost $70 billion was invested in direct commercial property, ATO figures show.

The value of the SMSF sector represents close to 30% of all funds in superannuation showing the depth of the desire people have to control their own investments and their belief they can do better than the professionals.

Property is appealing to SMSFs partly because it is a long-term investment. You can’t withdraw savings from superannuation until retirement so it makes sense to hold long-term assets there. 

People have had success investing in their own homes and believe they can bring that success to their SMSF.  However when PIAA (Property Investment Association of Australia) interviews property investors about their knowledge of the market place over 90% comment that they know a lot about property but they don’t know how to move forward with the selection of a property for performance to their goals and time frames.

In an SMSF it is particularly important to invest in property that has long term performance support and has strong exit appeal to support its re sale as mandatory SMSF drawdowns require.

Investment property can deliver attractive income levels when compared with assets such as term deposits, bonds and some Australian equities. On top of that there’s the prospect of capital gains.   

There are significant tax advantages to holding property within superannuation. Rental income is taxed at 15% and capital gains is taxed at only 10% after 12 months while the fund is in what’s known as accumulation phase, when the members are making contributions to its balance.

After the members have retired and start drawing a pension from the fund, any earnings and capital gains are tax free.  This can save tens of thousands of dollars in capital gains tax compared to holding a property in your own name.

Taxation rates on income to superannuation at 15% are also lower than all marginal taxation rates.  This means it can cost you less to earn the funds to invest in property in an SMSF than from your post tax savings account. 

Property held through superannuation qualifies for the same tax deductions as property held outside of a fund.

Residential property investments can also be used to protect against inflation, which is a significant risk to retirement savings as it erodes the purchasing power of money over time.

The Reserve Bank of Australia aims to keep inflation, measured by the Consumer Price Index (CPI), at between 2% and 3% a year over the medium to long term.

A 3% inflation rate means that every dollar worth of goods or services today will cost $1.03 in a year’s time. The effect compounds so in 10 years’ time, one dollar’s worth of goods today will cost $1.34. 

A well thought out investment strategy should have a plan for combatting the effect of inflation.  

Residential property can offset inflation as capital gains should, at a minimum, keep pace with the inflation rate. Rental income should also rise in line with CPI.  

Residential property is more effective at combatting inflation than money in the bank, and is generally considered lower risk than shares by financial planners.

In reality, the capital gains made on residential property in most parts of Australia have surpassed the inflation rate over the long term.

Research from Corelogic RP Data shows that across Australia’s eight major capital cities, home values increased by a cumulative 38% from the beginning of 2009 to the start of 2015. Each market rose over that period with Melbourne property increasing in value by 51.8% and Darwin homes gaining 24%. Sydney’s market was the strongest performer with prices rising by 56.9%.

A longer term analysis by CBRE, presented in its most recent Global Living report, found property values in Australia gained 221% over the 30 years to the end of 2014.  This result was second only to the UK of their surveyed countries.

CBRE attributes the strong result to Australia’s economic resilience, low interest rates and comparatively stable political landscape.  These are key indices of a strong property market and indicate strong capital growth drivers.

Source  :  http://www.propertyobserver.com.au/sponsored/43260-forrester-cohen-article-series-one-why-smsf-and-property.html?utm_source=Property+Observer+List&utm_campaign=0ea9ed2d1c-11_June_2015&utm_medium=email&utm_term=0_a523fbfccb-0ea9ed2d1c-245348873

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