Solid foundation to super investments
Every government outfit in town is against you setting up your own super fund to buy an investment property.
So is it a good idea or what?
The tax breaks are better than negative gearing normally and your super can bypass the sharemarket and still have an appreciating asset.
Mind you, I wouldn't be mortgaging my nest egg - let alone on a single property, or avoiding the sharemarket altogether - but then that's me. Guess I'm not alone, because for all the hand-wringing about mum-and-dad super funds speculating on property, the surprise is how few are.
Only 3.4 per cent of all self-managed super fund assets are invested in residential real estate, according to Graeme Colley, of the SMSF Professionals' Association of Australia. They're much keener on commercial property, especially if it houses their business.
Nor are they borrowing. Fewer than one-half of 1 per cent of SMSF investments are geared.
Yet look at the tax breaks. No need for negative gearing, for starters.
Why would you bother? The tax rate on a DIY super fund is so low - a flat 15 per cent - that a property with a half decent yield will stand on its own, er, foundations, without having to run up a self-defeating loss.
And that's nothing, almost literally. When you sell, the real advantage of an SMSF hits you. The tax on the capital gain is only 10 per cent. Or nothing at all if you're selling after you've retired, because then super funds don't pay tax.
Perhaps best of all, your boss's compulsory contributions can help pay down the loan instead of disappearing into a fee-infested managed fund or some form of fixed interest earning next to nothing.
It all sounds too good to be true, which is just what the regulators want you to think. The Tax Office sees it as a drain on revenue, ASIC as open slather for property spruikers and developers, and the Reserve Bank as being too risky. Well phooey to them. But don't think running an SMSF is a piece of cake, either.
Setting up an SMSF will cost a few grand a year in accounting and compliance costs. There's a lot of red tape - for example, the property has to be valued at the end of each financial year.
And get this: having set up what is in effect a trust, you then need another one to hold the property.
And it's not as if the borrowing is your run-of-the-mill bank loan. It has to be non-recourse, which means if you default on the repayments, the bank can only seize the property and nothing else from your super fund. No surprise then that the banks charge more and demand a corresponding increase in the amount of paperwork to protect themselves.
There are also petty restrictions, expressly designed to cramp your style. You're not allowed to add value to the property, for one. You can claim repairs, but forget about renovating the place or improving it.
So subdividing is out, for instance - not that this would be any handicap for a unit.
Any transgression will be met with your fund being stripped of its super status, with a penalty tax thrown in for good measure.
And you weren't thinking of buying a holiday house with your super fund to let out for part of the year, were you? Good, because you won't be allowed to go near it.
Read David Potts in Weekend Money, with
The Sunday Age.
Twitter @money potts