18 Apr Tax Q&A: Setting Up An SMSF For Investment Property
Q: I haven’t set up an SMSF (purely for purchasing investment properties) yet, but I got some advice recently that I should purchase my first investment property outside the SMSF for personal tax reasons.
My salary is $120k–$150k and my wife doesn’t work at all. Is it best to purchase the property as:
a. 50/50 ownership
b. 99/1 ownership in my favour
c. 99/1 ownership in her favour
Or is it not as simple as that?
A: Investing in property through an SMSF can be a great way of improving retirement savings in a concessionally taxed environment. Earnings from the property are taxed at a maximum of 15%, and where the asset is held for more than 12 months it is eligible for a one-third discount on capital gains when it is ultimately sold.
If the asset underpins an income stream in retirement, tax – including capital gains tax – can be eliminated altogether.
“From a tax perspective the benefi ts can be greater outside of super than within, depending on your marginal tax rate”
Importantly, however, where a property is negatively geared (that is, interest and other costs exceed the income generated by the asset), the tax deduction within a super fund is also at 15% rather than at your personal marginal tax rate, which would apply if you hold the property in your own name.
Therefore, from a tax perspective the benefits can be greater outside of super than within, depending on your marginal tax rate.
If your SMSF needs to borrow to purchase the property, other challenges exist. Interest rates are generally higher for SMSFs, and although the banks only have limited recourse against the asset for which the loan is obtained, they will frequently require personal guarantees from the members of the fund.
Additionally, the rules for borrowing are complex, and the set-up costs for these arrangements can be high, as the asset needs to be held on trust for the SMSF and not held by the fund directly.
SMSF trustees typically need the assistance of an advisor when embarking on these arrangements.
If you are purchasing outside of super and you expect the property to be negatively geared, purchasing in your name can be advantageous as the rental losses can be offset against your income for tax purposes. However, this also means that any capital gains on the property will be taxed at your marginal tax rate (subject to a 50% discount where the asset has been held for more than 12 months).
If you expect the property to be positively geared (income exceeds expenses) either initially or soon thereafter, then it may be better to hold the property in your wife’s name. She is on a lower marginal tax rate than you for rental income and capital gains. You might want to consider whether she intends to return to work and what her income will be at that time.
If you wanted to hedge your bets, you could simply buy the property together, with a 50/50 ownership share.
In this way, all income and expenses will be split down the middle and included in your respective income tax returns accordingly.
Director of the
Private Clients team at
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