SMSF Property Investment

P and R are some long-time clients of ours. P runs his own business and R works full time for another employer. They both do pretty well and they both love renovating property as a past time.

P and R have had a SMSF with us now for around 8 years, but neither are thinking about retirement just yet.

After 8 years, P and R have one commercial property owned outright in their SMSF and another via a unit trust in which they hold a 75% interest.

How did they do it?

Two successful professionals, on reasonable salaries, are able to salary sacrifice into superannuation and still have enough take home pay to live comfortably and pay off the mortgage.

Each year P and R contribute the maximum into superannuation. Even today this is a $50K top up in super per annum. Last year they got $70K in there. In years before that they were able to get $100K. This contribution strategy, together with their retail funds being rolled over into a SMSF has meant large overall tax savings for the family group and was enough to acquire a commercial property in Perth outright.

The contribution strategy continued, bumping up the cash reserves whilst receiving commercial rents each month as well. The net income of the fund is only being taxed at 15% this whole time, so they are retaining a lot of cash.

They found a residential property they liked, but didn?t have enough cash in the fund to acquire it outright ? only about 1/3^rd. Our strategy was to establish a unit trust. The SMSF owned 33.33% and so did P and R as individuals. P and R took out a bank loan for their third, but secured the loan against their primary residence which had a tiny mortgage on it and lots of equity. This meant the new property was unencumbered and the SMSF was allowed to invest. As the SMSF is not borrowing, the property can also be improved and the couple get to enjoy the renovation process that they love.

The contributions continue, the rental income continues and the trust is also distributing out a 1/3^rd share of profit. Soon the SMSF has cash reserves again. P and R pay tax on their trust distributions at high tax rates. To combat this the strategy is that each year the SMSF buys back some of P and R?s unit trust holdings, increasing the SMSF ownership % to around 75% right now. P and R use the buy back funds to pay off their loans. Any excess funds > the loan balance can go against private debt or back into the SMSF as a non-concessional after-tax contribution.

Next year the SMSF will own the Unit Trust outright and will have income streams from two properties, superannuation contributions, bank interest and also some preferred share equities they dabble in.

Since the property market in Perth recently slumped, the SMSF was able to buy back P and R?s units at a cheaper price. This means more of the future capital gain is locked away inside the SMSF at potentially 0% tax.

P and R now have a decision to make. What do we do with all this cash accumulating in our superannuation fund? It?s a nice problem to have.