That’s Super Newcastle

That’s Super

The advantage of buying residential property through a self-managed super fund

Bina Brown of The Weekend Australian Financial Review discusses how purchasing through a fund is worth the sacrifice. Ross, 48, is an electrician who earns a gross salary of $70,000 plus 9 per cent super that he has in an industry fund. He has paid off his house and has $150,000 in savings in his own name.

Worried that he will struggle to live comfortably in retirement, he hears that purchasing property via a DIY fund using an instalment warrant can help him build up his retirement nest egg. He starts a DIY fund. He could rollover his industry super fund but decides to leave it where it is as the $150,000 is enough of a balance to purchase a property.

 He sets about looking for an ideal investment property, finally settling for a house in a new suburb on Melbourne’s fringe. The house costs $500,000 so he borrows $350,000 via his fund using an instalment warrant. Martin Murden, director of Partners Superannuation Services, says the advantage of Ross borrowing through his super fund (as opposed to buying through his own name) is that repayments from a super fund can be increased through the use of salary sacrifice contributions.

After 10 years, assuming there is capital growth of 4 per cent a year, the value of the property will have increased from $500,000 to $740,000. But there is still an outstanding loan of $193,275 assuming the interest rate was 7.5 per cent per annum over the 10-year period. This is less than if Ross had purchased the property in his own name.

Because Ross has been salary sacrificing, the tax on contributions is 15 per cent where as outside super; he would have had to pay tax plus the Medicare levy of 31.5 per cent. After reaching preservation age (55 for anyone born prior to June 30, 1960, rising to 60 for those born after June 30, 1964), Ross could either retire and start a super pension or keep working and start a transition to retirement income stream.

If he does either of these before selling the property, the tax rate on the capital gains will fall to 0 per cent, providing a tax saving of $24,000.

Ross decides to sell, leaving him with $546,847 in his SMSF.