When should you consider an SMSF?

When looking at successful investment property strategies, it’s easy to start asking yourself: at what point should property be owned by my SMSF? What are the tax implications?

Super is a means by which to save so that in your retirement there is income (tax free) to live on, instead of drawing on the public purse of government pensions.

Positively geared property in a self-managed super fund (SMSF) has the advantage of lower tax rates, at only 15 per cent of net rental income and 10 per cent of capital gains.

Compounded over a 20-year/‍ two-property cycle timeframe, this can result in comfortable tax-free retirement incomes. 

Those aged between 20 and 35 may not have accumulated sufficient funds for a deposit, particularly if the fund’s primary contribution is coming from the statutory 9.25 per cent of wages. Adding a spouse or another family member to the fund would increase the pool of funds faster.

Young people have to balance their desire to spend money and explore life against the need to save for retirement. Salary sacrificing as close to the $25,000per annum cap as possible would help achieve a deposit faster – with the added advantage of tax saving.

For those aged 35 to 45, the challenges of life and family (children, losing one income stream, school fees, mortgage on a bigger home) are the major hindrances limiting members’ abilities to put more savings into their SMSFs.

Despite this, people in this age bracket tend to have been members for longer periods and often benefit from spousal contributions. Their increased earning capacity also means they can contribute more and thus, investment in geared rental property is achievable. However, complications arise when funds have to be split as a result of marriage breakdown.

Those in the 45 to 55 age group still have at least one to two property cycles available to take advantage of a strategy with investment properties in SMSFs.

With children growing up, leaving the home (and preferably earning their own income), there is more disposable income available to sacrifice into an SMSF.

Reeling from a structural budget deficit, the government has limited concessional (tax advantaged) contributions to caps at $25,000 per annum. More recently, they have capped the tax exemption on earnings of SMSFs supporting income streams (generally for people over 60 years of age) to $100,000 per individual per annum. The excess will be taxed at 15 per cent.

In the planning stages, this age group should give serious consideration to exiting at lower tax rates – for example, timing the sales of the investment properties and realisation of the capital gains to come in below the $100,000 taxable income limit, amongst other strategies.

With less time to plan before retirement than other age groups, baby boomers aged between 55 and 70 should preferably already have guidelines, if not plans, around how to exit and access funds – including tax-free pensions or lump sums.

Savings in a super fund are preserved until age 55 for those born before 1 July 1960 and up to age 60 for those born afterwards. After age 65, exit is generally tax-free.

It is always best to discuss your situation, figures and tax implications with your property tax specialist before committing to a transaction. Use the tax advice as part of the broader financial plan within the retirement context – especially for those on taxable incomes in excess of $300,000.

Disclaimer: The above is to be considered as general education. This is not advice and it is not to be acted upon without advice from a qualified professional who understands your personal circumstances.