How to take control of your SMSF, pay less tax on your property and retire early?

What is an SMSF?

A self-managed super fund (SMSF) is a type of retirement savings account that gives you complete control over your investment decisions. Unlike traditional superannuation funds, where your money is pooled with other members and managed by professionals, an SMSF allows you to choose and manage your own investments.

SMSF and Property Investment

The Australian Superannuation Funds Association (ASFA), the peak body for superannuation in Australia, calculates the lump sum needed at retirement for maintaining a comfortable lifestyle is $690,000 for couples, and $595,000 for individuals. However, according to the ATO, the average Australian male aged between 45 and 49 had only $190,716 in superannuation funds in 2021, while the average female within the same age bracket held only $142,037.

These figures underscore the importance of strategic financial planning in order to achieve a comfortable retirement. Having control over your own retirement savings inside an SMSF puts you in the best position to make strategic financial decisions to create wealth for your future.

With a balance of $900,000, an SMSF will allow you to live off $60K per year from 60 to 85years of age. This is nearly $20,000 more per annum than the average Australian aged pensioner income for a retired couple.

Tax optimisation and planning for early retirement with SMSF

Tax optimisation and planning for early retirement are crucial steps for those managing a Self-Managed Super Fund (SMSF). By taking control of their superannuation through an SMSF, members can tailor their investment strategies to not only grow their retirement savings but also implement tax-efficient measures that can significantly impact their ability to retire early.

How SMSFs facilitate early Retirement Goals

With astute tax planning, SMSF members can take advantage of the concessional tax rates within their fund. This allows them to contribute a larger portion of their earnings towards their superannuation, providing more capital for investment and ultimately allowing them to retire earlier. .

Furthermore, having full control over their SMSF enables members to make strategic investment decisions that can maximise returns and minimise taxes, leading to a more robust retirement fund.

Tips and strategies to retire early using SMSF

1. Invest in high-growth property:  Property is a popular investment choice for SMSF members as it provides steady cash flow through rental income and long-term capital growth. By carefully selecting high-growth properties, members can benefit not only from rental income but also capital gains.
2. Take advantage of tax deductions: SMSF members can claim tax deductions on various expenses related to managing their fund, such as accounting and legal fees, administration costs, and investment expenses. By utilising these tax deductions, members can reduce their tax liability and increase their retirement savings.
3. Regular Portfolio Review: Periodically review and adjust your investment strategy to ensure it remains aligned with your retirement goals, taking into account changing market conditions and your evolving financial situation.

Advantages of SMSF property investment

To protect your retirement and family’s financial future, it’s essential to have a diverse investment portfolio. Including property through your SMSF can offer numerous advantages, such as:

1. You can purchase an investment property without investing your own money:  SMSFs can take out loans to invest in property, making it possible to purchase a more expensive property than you could otherwise afford.
2. Potential for higher returns: By investing in high-growth properties, SMSF members can potentially achieve higher returns compared to other investment options.
3. Greater control and flexibility: With an SMSF, members have direct control over their investments, including the ability to choose what properties to invest in and when to sell. This provides more flexibility in managing their retirement funds.
4. Diversification of investments: Including property in an SMSF can provide diversification to your investment portfolio, reducing risk and potentially increasing long-term returns.
5. Retirement income stream: Once you reach retirement age, you can use your SMSF property investment to generate a regular income stream that is tax free, this will provide financial stability in your golden years.
6. Taking out a loan within your SMSF won’t impact your personal borrowing capacity outside of your superannuation: This means you can still invest in other properties or assets outside of your SMSF, giving you more opportunities for growth.
7. Including property in an SMSF also offers the potential to pass down wealth to future generations through inheritance planning strategies: By holding property within your SMSF, you can potentially pass down the ownership and management of the property to your children or other beneficiaries, providing them with a valuable asset for their own retirement..
8. Property investment inside an SMSF unlocks the power of leverage that no other superannuation investment can offer: With an SMSF, you can use borrowed money to invest in property, increasing your potential returns and allowing you to acquire larger or more valuable properties.
9. Tax benefits: SMSFs offer various tax advantages, such as lower capital gains tax rates and the ability to claim deductions on property expenses, including interest payments. Once you turn 60 and if you go into the Pension Phase, you can earn from your investment properties without paying capital gains or income tax. During the accumulation phase, property rental income is taxed at 15%, and if the property is held for over 12 months, the capital gains tax is effectively 10%. Self-Managed Super Funds are also eligible for a land tax exemption on residential properties up to a $250,000 threshold.
10. Leverage limited recourse loans, ensuring that no other assets within your SMSF are collateralised against the loan: This means that if the property investment is unsuccessful, your other superannuation assets will not be affected. This provides a level of protection that is not available with other types of loans.
11. All recurrent expenses, including interest, rates, taxes, repairs, insurance, and depreciation, should be tax-deductible for your SMSF: These deductions can offset any contribution tax paid, enhancing your superfund’s performance.

Summary

Since a pivotal rule change in 2007, SMSFs are now authorised to borrow funds for investing in various real estate types, including residential properties. This development is a boon for the increasing number of Australians eager to channel their superannuation into real estate investments, aiming to secure a steady income stream for their retirement years.

Real estate investment inside your SMSF can provide significant tax benefits, such as lower capital gains and rental income tax rates. Additionally, any capital growth on the property is also taxed at a concessional rate of 15%, unlike other investments outside an SMSF where it is taxed at personal marginal rates.

Historically, Australian property has shown to have strong long-term returns. By investing in property through your SMSF, you have the opportunity to take advantage of this trend while also diversifying your superannuation portfolio.

But like any investment, it’s important to be aware of the potential drawbacks involved in property investment through an SMSF.  These can include higher fees, more complex regulations, and limited liquidity compared to other investment options.

At Ironfish, we can advise you on the best investment strategies for your SMSF property portfolio, taking into consideration your long-term wealth creation goals. Our team of property experts can guide you in selecting suitable properties to add to your portfolio to ensure a diverse and sustainable investment mix.

Introduction for inexperienced investors -“Dreaming of retiring early? Self-Managed Super Funds (SMSFs) can help you achieve your financial future. By paying lower taxes on property investments, leveraging the potential capital growth of Australian real estate, and unlocking the power of limited recourse borrowing, you can reach your retirement goals sooner. Move beyond traditional super funds towards financial independence. Start your journey to your dream retirement today.

Introduction for experienced investors –  Looking to diversify your SMSF portfolio? Consider adding property investments to your mix. With the potential for strong long-term returns and the ability to leverage borrowing as a limited recourse option, property investment through an SMSF can increase your retirement savings and provide additional financial security.