SMSFs can for the first time access new build and land investments
Self managed superannuation funds (SMSFs) have, until now, had a restriction whereby you were not permitted to invest in brand new house and land builds but a new model offers a way to overcome this limitation.
The growing popularity of self managed superannuation funds (SMSFs) is largely due to their flexibility, including the ability to buy property, as opposed to the relative rigidity of industry or retail funds.
Indeed, the latest available Australian Taxation Office (ATO) figures indicate there were 603,432 SMSFs in Australia in June 2022, up 4.4 per cent per cent on the previous quarter.
But even with the range of options presented by an SMSF, there are still limitations.
Currently, with an SMSF, you can only invest in established property, apartments and townhouses, however, you are not legally allowed to invest in brand new house and land builds, ultimately limiting the choice of the investor where you are using debt.
This was a point of dissatisfaction that inspired Raymond Hempstead, Director, One Contract Property, to devise a business and product that could redress this restriction of choice.
Raymond Hempstead, Managing Director, One Contract Property
“The aim was to give people more choice about how they fully utilised their SMSF to incorporate new builds, and to potentially explore the richer returns of things like NDIS and co-living property investment,” Mr Hempstead said.
Their unique three step process allows SMSF accounts to invest in brand new house and land builds.
As a first step, One Contract Property helps the client find the land, choose a builder and decide how much money they’d like to invest.
The SMSF then enters into a single part contract with One Contract Property and pays a 35 per cent deposit. One Contract Property acquires the land, oversees the construction of the property and all payments to the builder.
Upon completion, the SMSF pays the 65 per cent balance. The completed property is transferred. The sale is then finalised, with the SMSF now owning a new investment property.
NDIS builds are a new SMSF option
That process can be applied to any new build, including duplexes and NDIS properties.
An increase in the need of Australians requiring supported living is marred by the shortage of NDIS properties nationwide.
Building NDIS properties can obviously contribute to alleviating this shortfall but the reality at present is that NDIS properties can deliver returns three to four times that of traditional property investments.
This is due in no small part to incentives from the Specialist Disability Accommodation (SDA) scheme set up by the Federal Government.
“At One Contract Property we strive to improve the lives of those living with disabilities and have partnered with service providers to issue quality NDIS housing,” Mr Hempstead said.
“The NDIS SDA homes do not have official building standards, however, to ensure that our NDIS homes meet current building standards, they are built to Liveable Housing Australia (LVH) standards.”
The rise of SMSFs
SMSFs are a way of saving for your retirement through a private superannuation fund you manage yourself.
The alternative to traditional super came into existence in 1999 as a means of allowing small businesses and self-employed individuals to establish and manage their own superannuation accounts.
The difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees.
This means the members of the SMSF run it for their benefit and are responsible for complying with the requisite super and tax laws.
According to the ATO’s most recent figures, 69 per cent of SMSFs had two members, typically a married couple, followed by 24 per cent with just a single member. Those with three or four members made up just 7 per cent of funds.
“SMSF members can invest their super money in property, shares, cash, term deposits and debt securities and other unique investments,” Mr Hempstead said.
“With an SMSF, members can make financial decisions that can grow their retirement savings exponentially.”
Property investment inside and outside superannuation
Buying property within the realm of an SMSF and outside of super both have their advantages, but when it comes to tax benefits, one far outperforms the other.
Mr Hempstead said it was important to buy property to generate passive, disposable income from rent and to benefit from capital growth.
But doing so within an SMSF as part of a retirement security plan produced significant tax advantages.
“Outside of super, property earnings will be taxed at anywhere from 30 to 47 per cent, whereas within super that same investment return attracts tax of just 15 per cent,” he said.
“For properties purchased outside the super model, that higher taxation level continues even into retirement, when those who had bought inside the super model are able to access their funds but are benefiting from tax-free earnings after they’ve reached retirement.”
Mr Hempstead said that media headlines swirling around superannuation policy were of no consequence to his clients and investors.
“The government will always support and promote superannuation because it is far better than the alternative of funding Australians on welfare.
“In a way, all the media hype is good because it is prompting more people to re-examine and assess their own superannuation position and goals.”
