Can I buy property with my super?
If you are wondering, can I buy property with my super, you are not alone.
It would seem there are few ways to shield your hard-earned cash from hefty taxes.
But it’s not impossible — and you don’t have to go offshore because tax-minimisation strategies are legal in Australia.
You need only look to superannuation and property to find some of the best tax haven benefits on earth.
Take superannuation. It’s as simple as understanding how it is taxed to take advantage of concessions that can reduce your liability.
Super is taxed in three ways:
- when money goes in the fund (contributions);
- while it sits in the fund (investment earnings);
- and when it leaves the fund (super benefits).
Some tax-effective strategies not only reduce the liability at all of these stages, they can create a zero tax environment. And you don’t have to be on a high income to benefit.
It makes sense to consider buying property with your super.
For those earning $53,564 or less per year (before tax) for 2019-20, who make after-tax contributions to their super under the co-contribution scheme are eligible to receive matching contributions from the government. Something for almost nothing.
On earnings less than $38,564 for 2019-20, for example, the maximum co-contribution is $500 based on $0.50 from the government for every $1 contributed. In effect, you make a 50 per cent return. Try getting that from a term deposit.
Low and high-income earners can reduce tax using pre-tax dollars through salary sacrificing. This is when your employer redirects a portion of your pay as a contribution to super. By sacrificing some of your before-tax salary and putting it into your fund, you’re taxed at only 15 per cent.
There are caps on the amount you can contribute to super in any one year but the tax savings from making pre-tax contributions through salary sacrifice is one of the easiest strategies to decrease the tax you pay while increasing your super returns.
Investment earnings – buying property with super
The more you put in super the less you pay in tax because income earned in super attracts a maximum rate of 15 per cent. The amount of tax a fund pays depends on whether it has any tax deductions or credits. For example, a growth fund may only pay 7 per cent tax because its dividend income entitles it to tax credits. So it is also good to know, that in most cases there is no additional tax payable when transferring from one super fund to another to consolidate or switch funds.
There are tax benefits when you become eligible to access your super. Whether you opt to take a super income stream to provide a regular income, or withdraw all or part of your benefit as a lump-sum, in most cases the money incurs no tax.
If you’re eligible to transition to retirement, once the fund starts paying a pension, the earnings on the investments become tax-free, along with any money taken out of the fund. In effect, it creates a zero tax environment because the contribution forms part of the ‘non-taxable component’ within super. If you transition before age 60, this portion of income should also be tax-free.
Power of property – can I buy property with my super?
One of the most popular methods to reduce tax is to buy an investment property. Under the right circumstances, the strategy of negative gearing not only can help cut your annual tax bill but it may also attract a capital gain. This often works best for high-income earners as gearing involves funding a purchase with debt. To reduce the amount of income tax you’ll pay, the loss will be deducted from your annual income.
The success of gearing an investment property also depends on making the most of depreciation and expenses. Therefore, it’s important to know what is deductible, what’s not and when to claim or pay for it. For instance, you can prepay interest on an investment loan up to 12 months in advance, then claim the deductions against your salary in the current financial year.
Whether you buy property within your super or directly will depend upon your personal financial circumstances and it is important to seek independent financial advice before you do anything. Every strategy can have different tax and financial consequences, and often property transactions are not easily reversible. Just make sure it’s right for you before you sign on the dotted line.
Another way to maximise spare cash is through an offset account on your investment mortgage. Not only can it reduce the interest you pay, it can also shorten the loan term. And you won’t have to declare the interest savings as income.
If you are looking to preserve your hard-earned dollars via tax-minimisation strategies you should seek expert advice before you buy property with super.
The Australian Financial Review publish their guide to the do’s and dont’s of property and super.
If you’d like to chat about finance, please contact us.View more