It is what we have all thought when we looked at the property market. You look at the prices increasing and you say, I would love to invest in a property, but I simply do not have the deposit.
Then you recall that you have a nest egg in your superannuation fund. It is probably the second-largest thing that you possess after the family home.
The big question is therefore: Can you use that money to construct a house or develop property?
The short answer is yes., but it is complex.
You cannot simply go to the bank and use your super balance as a deposit. In order to make this work, you require a certain plan, a certain kind of fund and you must abide by some very strict rules.
The following is a basic outline of its operation.
Step 1: You Require a Self-Managed Super Fund (SMSF)
The majority of us have our super in big industry funds (such as AustralianSuper or SunSuper). This money is a pool of everyone’s money to invest in stocks and commercial buildings. They do not allow you to choose a certain piece of land to purchase.
In order to select your own property, one must establish a Self-Managed Super Fund (SMSF).
Imagine that an SMSF is like taking the steering wheel of your retirement savings. You are the trustee, which means you make the decisions. And with that control comes responsibility. You are the one who makes all the decisions of the fund.
Step 2: The “Sole Purpose” Rule
You must be aware of the most crucial rule of superannuation before you begin looking at floor plans.
Anything your SMSF does should have a single purpose, provide money for retirement.
This is the Sole Purpose Test and it states:
- You are not allowed to live in the property.
- You cannot live in the property with your family.
- You are not allowed to rent it to your friends or family members.
- You cannot make it a holiday home.
The property should be an investment only. It must be leased to a true tenant whom you are not acquainted with.
Step 3: Buying vs. Building (The Tricky Part)
This is where the majority of individuals are stagnated. The difference between purchasing an already existing house and constructing a new house is enormous.
When you are purchasing an existing house:
This is fairly standard. Your SMSF can borrow money from a bank to buy the house. You deposit some money, the bank lends the balance, and the rent pays off the mortgage.
When you wish to construct or develop:
This is much harder. As a rule, you cannot build with borrowed money.
When you would like to purchase a piece of land that is vacant and construct a house there, you would normally be required to pay for the construction using cash that is already in your super fund. You are not able to get a construction loan in the context of SMSF as you would in your own house.
Therefore, in case you do not have sufficient money in your super to afford the land and the construction itself, this plan may not work in your favor.
Step 4: No DIY Allowed
Are you handy with a hammer? Do you love a bit of painting?
But you cannot apply those skills here. You are not allowed to do any of the work yourself.
This is very strict in the tax office (ATO). When you work they will regard your labor as a contribution to the fund and it leaves a legal headache. You cannot even pay yourself to work.
You have to employ external workers. This is where you should get a professional Home Builder to deal with the whole project on your behalf, offer you a fixed-price contract, and deal with the construction process all the way through, while you remain completely hands-off.
Step 5: Obtaining the Right Advice
The cost of establishing an SMSF is high. You have setup charges, annual legal expenses and audit expenses.
To make it worthwhile most experts would say that you require a balance of at least $200,000 to $250,000. When your balance is smaller than that, the fees may consume all your profits.
The stakes are great, so you should not just guess. Having a meeting with a professional advisor like financial advisor Shellharbour is a clever start. They are able to examine your numbers and inform you whether you do have sufficient funds to make this strategy work without jeopardizing your retirement.
Why Do People Do It?
Why should people bother when it is so difficult?
The Tax Benefits.
Superannuation is a tax haven.
- Only 15% is taxed on rental income in your super fund.
- In case you sell the property after one year, capital gains tax is only 10%.
- Tax on rental income and sales can also reduce to 0 once you retire.
It is a big plus over purchasing property under your name where you may pay as much as 45 percent tax.
But in order to enjoy these benefits, you have to have perfect paperwork. SMSFs are regularly checked by the ATO. That is why it is necessary to cooperate with a good Shellharbour accounting company; they will deal with complicated tax reporting and annual audits to make sure that you do not slip up and pay hefty fines.
The Verdict
Super is a high-level strategy of developing property. It’s not for everyone.
It takes a big initial capital, a strong team of professionals and a lot of time. However, it can be an excellent means of boosting your retirement savings to the right investor.
In case you are considering it, begin by answering three questions:
- Will I be able to meet the costs with the money in super?
- Would I be okay to never live in or use the property?
- Would I pay for professional advice to make it legal?
If the answer is yes, then it may be time to take a closer look at your super.