Investors ask: SMSFs and property
"I have an investment property in my SMSF and it is providing some cash flow. I can put in the extra $25,000 contribution each year to my SMSF, or I could use it to build a property portfolio outside of the fund. What's the best approach?"
If you are in receipt of a salary, your employer has to pay 9.25 per cent of your salary into a superannuation fund as a compulsory contribution.
If the money is paid intp a complying superannuation fund, the payer receives a tax deduction and your fund pays 15 per cent tax. The exception to this is that a higher rate will apply if your income is greater than $300,000. Should some or all of the $25,000 have been received by you, it would be treated as taxable income and taxed at your marginal tax rate, which could be as high as 46.5 per cent.
When the property is negatively geared, there is an advantage to owning it outside an SMSF - any losses are offset against other income. For an SMSF, a loss of $1,000 is only worth $150 of tax saved. Your marginal tax rate will determine how much tax you save on investment property owner in your name.
When it comes to selling the property having owned it for more than a yearand assuming there is a profit, 50 per cent of profits made personally are exempt from tax and the balance is taxed at your marginal tax rate.
With an SMSF, one third of the profit is discounted and the balance taxed at 15 per cent. But if you are in receipt of a pension from your SMSF, the tax rate can be as low as nil.
Martin Murden, founding partner, Partners Group