SMSFs, property and income

PORTFOLIO POINT: Thinking of cashing up your property portfolio to get your money into super? Here’s what you need to know (Part II).

If super is a powerful way of creating wealth (and saving on tax) for your future, then property in SMSFs can be simply awesome, if you get the investment right.

Super laws mean that benefits and income earned by the fund are tax free in pension phase. The opportunities in property, when bundled with a SMSF, can be almost endless. Particularly when gearing is added into the mix.

Last week, I started a two-part series on what needs to be considered by those who have existing property assets outside of super who are thinking about potentially changing the strategy and buying future property inside super. Click here (23/3/11) for that article, which covered capital gains tax, income tax, purchase costs and transferring large sums into super to purchase property.

Today we’ll have a look at pre-CGT assets, looking at what you should consider if you were never going to sell your non-super property, locking in your CGT bill now and positive geared property in super.

We’ll use the same example property again for this week.

Example property

A property you bought 13 years ago with a cost base of $150,000 could now be sold, net of sale costs, for $400,000. (Obviously, property gains can be far greater, or far smaller than that, depending on purchase price and length of time held.)

Pre-CGT asset

If you have a pre-CGT asset (bought before September 20, 1985), then the capital gains tax calculations are not relavant to your asset.

In essence, you might have an asset you can sell and pay no tax on and then transfer the proceeds it into an environment where you will never have to pay tax on again (inside a SMSF pension fund). What would be the point? Well, while pre-CGT assets are CGT free, they are not free of income tax. And it would be a surprise if pre-CGT property assets are not now positively geared.

By selling and purchasing a similar property inside super, you could potentially receive tax free income from the investment.

What needs to be weighed up in this case is the costs of the transaction. You’ll have sales costs on your current property and purchase costs on the new property inside the super fund. (And if you purchase it with a loan, you’ll also have the costs of setting up a bare trust and corporate trustee.)

But I have no intention of ever selling!

If you were never going to sell a particular asset, then you’re leaving the CGT issue for the next generation. And that’s fine. They are picking up an asset for “free”. If they ever dispose of it, then they can cop a bit of tax for the fact that they’ve picked up a free asset.

In that case, you don’t need to consider CGT in your lifetime. The main tax implication for you then might still be the income tax issue. If you are earning a net $20,000 in rent from your asset, then you are losing as much as 46.5% of that in income tax each year, or $9300, depending on your current taxable income.

If you were paying $9300 a year in income tax on a positively geared property – where you could, potentially, be paying $0 on a similarly positively geared property inside your SMSF – you’d be excused for wondering if some further maths was worth doing.

If you’re going to be alive for 10 years, then that’s up to $93,000 in tax (in today’s dollars) you’re going to pay. On our example property above, if you were to replace with a similar asset, that’s potentially more than the 9-10% cost of selling and buying a house, PLUS the cost of CGT. After that, you’ve got an asset that is both tax free in an income and capital gains tax sense.

Lock in your CGT bill now

Let’s say we sell our example property and buy another similar one. The CGT paid now will (current legislation continuing) be locked in.

If the property doubles in value over the next 10 years, then it’s now worth $800,000 and the CGT to pay would be significantly more. If you live for 20 years and the property has doubled in value again, it’s now worth $1,600,000. If you were to sell at that point, there’s now a monstrous CGT bill to pay. Using the above tax rates, there might be a tax bill of $250,000 to $300,000 to pay.

However, if you sell, pay your CGT and then buy a new similar property inside super – with the existing tax-free status of pension funds in place – you will have paid $47,500 in tax now, but if you do need to sell at the 20-year mark when it’s inside super, there would be no tax to pay.

Property turns from negative from positively geared

So far, we have not really discussed gearing for property inside of super. If you bought an existing non-super property with gearing some time ago, then there’s a good chance that it was negatively geared at the time you purchased it. If you’ve held it for some time, then it might well have turned neutrally geared, or even positively geared, over the course of your ownership.

Since the gearing changes were made to super in September 2007, it has been possible to gear into super to purchase investment property. The risks inside super are similar to those outside of super, but there are several other important differences between gearing outside super and inside. For a start,, it’s still a relatively new industry and there are not too many lenders who have set up with the right products to be able to cope with it, as there are strct laws in place, particularly as they related to limited liability. The ownership structure requires a bare trust on behalf of the super fund.

If you were to purchase your new property inside super with gearing, then you might be able to save on some contributions tax (potentially for both of you). See these articles here (20/10/2010), here (17/11/2010) and here (21/4/2010).

The great thing about property is that property tends to move from negative to neutral to positive over time as the property is held and rents rise. This has the potentially to work particularly well for SMSFs, if the property is negatively geared during the accumulation phase, where contributions tax can be clawed back and if it turns neutrally or positively geared in pension phase.


Ownership of property assets inside super funds is a complex business, but potentially very rewarding for those willing to take on the increased risk, particularly where it relates to geared property in SMSFs.

This two –part column is certainly not to suggest that SMSF trustees who own property outside of super should rush to sell, transfer the money into super and then purchase again.inside super. But under certain circumstances, it may be worthwhile crunching the numbers, because some potential costs now could be worth it to have a tax-free asset and income stream in retirement.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.

Leave a Reply

Your email address will not be published. Required fields are marked *