What are the SMSF benefits when investing?
| Comparison point | SMSF | Individual |
| Tax on rent | Taxed at 15% while members are working.
Taxed at 0% once members are retired and drawing a pension |
Taxed at marginal tax rate (up to 49%) regardless of whether members are working or have retired |
| Capital gains tax | Taxed at 15% if asset owned for less than 12 months. Taxed at 10% if asset owned for more than 12 months.
No capital gains tax payable if members are retired and drawing a pension |
Taxed at marginal tax rate (up to 49%) regardless of whether members are working or retired. |
| Access to rent as a form of income | Can only be withdrawn from the SMSF as a pension over age 55 | Can be accessed at any time |
| Use of the investment property | Cannot be used for personal use by the members of the SMSF or any person related to the members of the SMSF. | Can be accessed for personal use at any time. |
| Deposit required | Minimum ‘20% + costs’ required | Minimum ‘5% + costs’ required |
| Cash flow | Loan repayments are made from a combination of rent, personal contributions, and your employer contributions | Loan repayments are made from rent and your surplus income. |
| Tax effective loan repayments | By making a concessional contribution to your SMSF and using that cash to repay the loan, you will have more money available after tax to make repayments. Thus, your loan will be paid off sooner. | All repayments on the loan are made with after-tax dollars.
Your personal tax rate may be as high as 49%. After tax that leaves 51 cents to make any additional loan repayments. |
SMSF benefits when investing in property vs. personal ownership
Often borrowing arrangements are started in the name of an individual who is subject to a high marginal tax rate. The decision is usually driven by the immediate tax benefits when the investment property is producing net losses each year. This may make perfect sense whilst the investment property remains negatively geared. However, if the investment property later produces net income, rather than net losses, and ultimately large amounts of capital gains upon disposal, a high marginal tax rate can be a burden on the overall profitability of the investment property.
The generally lower effective tax rates applicable in superannuation are attractive when an investment property is positively geared. So an intention to reduce debt quickly via principle and interest repayments and extra repayments via surplus funds held in your SMSF may be something to consider if cash flow is of no concern for your SMSF.
As you can see in the table below, superannuation attracts just 15% tax on earnings, and an account-based pension (AP) has a zero tax rate, making super a very attractive structure through which to invest
Tax rates on the different investment structures
| You | Up to 49%* |
| Company | 30% |
| Trust | Marginal tax rate of beneficiaries |
| Super | 15% |
| Pension | 0% |
* Includes Medicare levy and the temporary deficit levy
SMSF benefits have proved particularly attractive for:
- Retirement planning for retirees seeking to utilise the flexibility of SMSFs to manage and pay their own pensions but retain control of the underlying investments. This includes those approaching retirement age who are switching from the accumulation phase to the pension paying phase
- Small business operators and self-employed workers who are attracted to SMSFs lower-cost alternative for higher account balances or to enable them to hold their business real property in their SMSF
- High net worth individuals seeking to utilise the concessional tax treatment for holding investments in this environment and the flexible estate planning features
- Property investors looking to invest directly in property using their superannuation savings and/or in combination with a LRBA.
- Potentially more cost effective on larger balances as the costs are often fixed dollar amounts compared with managed funds charging fees as a percentage of funds under management
- Greater control over life and disability insurance options
- Flexibility in managing the protection of superannuation assets from creditors in the event of bankruptcy
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