Five questions to ask when deciding between SMSF gearing and personal gearing in property
Yesterday we looked at an example of personal gearing versus SMSF gearing.
Before gearing a property, it is advisable to ask your accountant and/or financial planner to do some projections to determine whether you may be best to gear in your own name or through your SMSF.
Points to discuss with your professional adviser when working out your investment projections for an investment property include:
1. How long should I expect the property to remain negatively geared? Factors to consider here include the size of deposit paid, expected capital repayments and expected rental yield. Higher-income earners in particular will reap much bigger negative-gearing tax benefits than a concessionally taxed super fund. But once the investment becomes positively geared, rent is subject to lower taxes if it is within a super fund.
2. What is the likely capital growth of the property? The greater the capital growth, the greater the capital gains tax (CGT) savings if held in a super fund – particularly if the property is sold when backing a superannuation pension (when CGT no longer applies).
3. What if the property’s value falls during my ownership? Paul Banister, tax partner of accountants Grant Thornton in Brisbane, stresses capital losses in an investor’s own name are more valuable to offset present and future personal capital gains than losses in a super fund. And once the property is backing the payment of a pension, capital losses have no value because the asset is no longer taxable.
4. Should I maximise my concessional super contributions? The making of more concessional contributions within your annual contribution cap to help with the cashflow of a fund-held investment property can provide immediate tax breaks.
Concessional super contributions are taxed at just 15% – not the usual marginal rates applying to your personal income. This means, for instance, a taxpayer with a 38.5% marginal rate receives an instant 23.5% tax break. (Concessional contributions comprise mainly salary-sacrificed, compulsory and tax-deductible contributions by the self-employed.)
5. Is it realistic to aim to sell an SMSF-held property in the CGT-free pension phase? The answer depends on a range of factors including your age. A young investor, for instance, may be most unlikely to keep a property until nearing retirement (when eligible for a transition-to-retirement pension from age 55) or in retirement.
Banister says when making a decision about whether to gear a property in super or in your own name “involves trade-offs”.
While gearing in your name can provide more immediate tax subsidies from personal negative gearing, holding property in superannuation may produce, according to the circumstances, more tax benefits over the long-term including the possible elimination of CGT. Another issue is that it costs more to setup a gearing arrangement through a SMSF than in your own name.