Real estate is gaining popularity as the asset of choice for self managed super funds as more Australian workers decide to become the master of their own financial destiny.
And the big reason for this significant increase in the way we manage our super?
Quite simply, it gives us more control over our retirement fund along with the ability to invest directly and skip the middleman, whose services can come at a hefty cost.
As at June 30 2009, 76 per cent of funds in SMSF’s were made in direct investments, compared to just 20 per cent in trusts and managed investment structures.
Interestingly, direct property investment within SMSF structures has also increased, even though there is still some confusion surrounding trustee managed property holdings within a SMSF when it comes to selling the asset.
Then there’s the responsibility the trustee has to prepare a detailed strategy for investing within the fund, which has to consider;
- How to maximise member returns through the investment, taking into account risk factors.
- The benefits of diversification across different asset classes.
- The ability of the fund to pay all associated administration and management costs and of course, the members as they retire.
- The different needs of members based on age, income, employment and retirement needs.
The ATO rules that govern property investment by trustees in a super fund are actually quite flexible and allow for;
- The ability to borrow the necessary funds to purchase property.
- The ability to purchase any type of property, unless it’s bought from a member or related party. In this situation, the property must be for commercial purposes and the trustee has to obtain a valuation to show the asset was purchased at market value.
- And the same restriction as above applies to rules governing who can live in the property, with fund members or relatives unable to rent a property owned by the fund unless it’s for commercial use.
What’s the end game?
So what happens when it comes time to retire and you need to access the money generated from property(s) held in the self managed super fund?
When a member retires, the fund can sell the property to them or transfer ownership as an in specie lump sum payment.
If the latter option is taken, a valuation has to be obtained to establish the correct market value and determine whether stamp duty has to be paid.
However if ownership isn’t transferred until the super fund is in its pension phase, no tax at all is payable on any capital gains made.
As the ATO continues to ease up on the regulations surrounding the holding of real estate in self managed super funds and what you can and can’t do within this super structure, and as share markets continue to give investors the jitters, I expect to see more and more people buying property in their SMSF’s.
I know that’s what I’m doing!
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