Purchase Property Using Superannuation

The ability for investors to purchase property with their superannuation may be under threat due to the findings of the Murray inquiry last December.  The Murray inquiry stated that “the current ability to borrow directly may, over time, erode this strength (of superannuation) and create new risks to the financial system”.  Currently, by using the equity in your SMSF you are able to purchase property within your superannuation using borrowed funds.  There are further rules regarding what type of property and how it needs to be structured, but the benefits can be substantial.

For example, purchasing a commercial premises with your SMSF offers business owners lucrative tax breaks.  Rental income paid to a SMSF is tax deductible to the business owner while the rental income is concessionally taxed within the SMSF – within accumulation phase at 15%.  And if/when the SMSF is in pension phase the tax on income is 0%, the CGT is 0% and both the rental income and property value can be withdrawn tax free from the SMSF (if the member is over 60 years of age).

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The Abbott government is currently struggling to get meaningful legislation change through the Senate to improve the budget deficit situation.  They are also under pressure to reduce tax breaks on super and tackle a rising property market in a low interest rate environment. By implementing the Murray inquiry findings and banning borrowing within superannuation, the Abbott government will reduce the ability for superannuation funds to purchase property.  This will create lower demand on property, reduce the tax concessions within super and improve their budget position.

The May budget could be a platform for the government to draw a line in the sand and disallow borrowing inside of super from that point on.  We suggest that if purchasing property inside of superannuation with borrowed funds is something that is appropriate for you and your business, that you look to organize this sooner rather than later (as it is expected that arrangements already in place will be grandfather under existing legislation).

Please contact Solace Financial before considering purchasing property using superannuation.