Retail could provide a good investment for self-managed super

Retail could provide a good investment for self-managed super
Retail could provide a good investment for self-managed super

Self-managed super funds are increasingly turning to commercial property investments.

ATO statistics for March 2011 show that after listed shares (32%) and cash (27%), non-residential property (12%) is the third most-held asset by self-managed super funds.

Changes to rules governing superannuation that allow SMSFs to borrow money to buy commercial property assets, provided they structure their investments correctly, as well as attractive tax incentives, have also added to the appeal of this asset class.

Furthermore, NAB forecasts all sectors of commercial property to return to positive rental growth by March 2013, with capital values tipped to rise as well.

The June Herron Todd White Month in Review report points out retail property markets that have either just entered growth phases or are on the verge of doing so – suggesting there may be opportunities for astute investments.

According to the report, retail property values on the Gold Coast and Gippsland have already bottomed out and are starting to recover.

A little further behind in the cycle are 12 other markets that have all bottomed out, suggesting a recovery could be on the cards in the medium term.

These include the capital cities retail markets of Canberra and Brisbane; NSW regional markets of Griffith, Mudgee, the Far North Coast and Wollongong; Victorian regional markets of Warrnambool and Mildura, and the smaller Queensland markets of Cairns, Townville, Gladstone and Bundaberg.

Retail markets that have bottomed out/started recovering

 

Stage of property cycle

Rental vacancy situation

Volume of property sales

Local economic situation

Gold Coast

Start of recovery

Large over-supply relative to demand

Declining significantly

Flat/contracting

Gippsland

Start of recovery

Balanced market

Declining

Contraction

Canberra

Bottom

Balanced market

Steady

Flat

Brisbane

Bottom

Over-supply relative to demand

Steady

Flat

Griffith

Bottom

Over-supply relative to demand

Declining significantly

Flat

Mudgee

Bottom

Over-supply relative to demand

Steady

Flat

NSW Far North Coast

Bottom

Balanced market

Steady

Flat

Wollongong

Bottom

Over-supply relative to demand

Steady

Flat

Warrnambool

Bottom

Over-supply relative to demand

Declining

Flat

Mildura

Bottom

Over-supply relative to demand

Declining

Severe contraction

Cairns

Bottom

Balanced to oversupply relative to demand

Steady/declining

Flat

Townville

Bottom

Balanced

Steady

Flat

Gladstone

Bottom

Balanced

Steady

Steady growth

Bundaberg

Bottom

Over-supply relative to demand

Declining

Steady growth/flat

Source: Herron Todd White

 

Growing appeal of property

Any decision that SMSF trustees make about purchasing retail property or any other commercial property must have the sole purpose test in mind, says Peter Burgess, technical director at SMSF Professionals' Association of Australia.

“There must be some potential for capital appreciation and/or income being generated from the asset,” he tells Property Observer.

“You should seek professional advice from a specialist in this area as there are various ways you can transfer property into your fund, depending on your personal situations

“Commercial property is an investment like everything else – you need to do capital appreciation research,” he says.

Tax breaks

In addition to the possibility of increasing the value of your super fund, there are huge tax advantages in investing in commercial property.

“Once you transfer the asset into your fund you are in a lower tax environment,” Burgess says.

If you’re under 55 years, the maximum tax rate on rental income is 15% and 10% on capital gains once it is sold.

Once the SMSF moves into the pension phase, the tax rate drops to zero.

According to Dixon Advisory executive director Nerida Cole, investing in commercial property that has a high yield can be very beneficial if the member of the superannuation fund is approaching retirement and is relying on super to provide a regular income stream.

The key, though, is choosing the right commercial asset.

“You have to get the right property to start with otherwise you won’t achieve the capital growth you are after and the steady income you are after,” Cole says in a video blog.

She says you also need to consider what you need from this investment. “Do you need the property to boost your income or for capital growth to grow your super?”

Buying your own premises

Rules governing the purchasing of property via a SMSF are complex.

While the caveat remains that investors should always seek financial advice before making any decision, the general rule is that a commercial asset cannot by acquired by SMSF for personal use by a related party to the fund.

“You cannot own a property in your super fund and then allow your extended family or business associates to rent that property out,” Cole explains.

However, a retailer may be in a position to transfer property he or she owns into his or her own super fund (changing from a renter to an owner of the property) and take advantage of the low tax benefits so long as the property is used wholly for commercial purposes, in which case it would be deemed “business real property”.

“Business real property is property you are using in the running of a business in a day-to-day basis, and that can have a related party using the property,” Cole says.

In this case, business owners need to be aware of contribution caps.

If you’re under 65 years, you can contribute up to $150,000, but this can be brought forward by two years, taking the total contribution to $450,000.

“If that’s you and your wife, you can contribute up to $900,000 and still not breach the cap,” Burgess says.

In all cases, it is recommended that you seek specialist advice to ensure you get the structure right, particurlarly if you’re thinking about borrowing to invest in a commercial asset.

“The SMSF needs to establish a borrowing trust within the fund, since it cannot borrow itself. You pay the loan down, and SMSF takes ownership of the property,” Cole says.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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