Superannuation: Getting Your Dream Home

For some people they find the place they have always dreamed of retiring to, but unfortunately they either don’t have the money now, or may still have time to go to retirement.

It may also be that the dream house is away from where they currently live, perhaps up the coast, or is too small for their current family demands.

Take the example Paul and June Jones aged 45 years with two teenage children, they have found their dream retirement bungalow by the beach at Port Macquarie which they would like to move to when they retire at age 65, but both Paul and June currently live and work in Sydney.

Paul and June have combined super of $150,000 and the bungalow will cost $500,000. They have an $800,000 house in Sydney of which they still owe $200,000, and the bank is willing to lend the couple an additional $350,000 for investment purposes.

The strategy comprises two elements:

1. Using your super to purchase the property; and

2. Taking the asset of the super fund at retirement as an in-specie Eligible Termination Payment.

Purchasing the Property
Paul and June Jones have equity in their home. They use this as collateral for a loan to buy an investment property. The borrowed funds, plus Super Fund cash as the deposit, are pooled within a personal unit trust, which buys the property. The debt is borne by Paul and June, not the trust, and as such can be negatively geared within their personal tax returns.

Annually, of course, 9% of income is legislated in to their Super Fund, plus they can salary-sacrifice money at 15% tax. This money can be directed into the unit trust, and then returned, tax-free, as a capital return to Paul and June, who use it to pay down the original debt.

In other words, Paul and June use money taxed at just 15%, not up to 48.5% to pay off the property debt they have in their own name. Thus, more money than they would normally have ‘free’ goes towards the debt and they pay down quite significant chunks annually. The cumulative effect of this after 5 - 6 years is huge.

The benefits thus far:

Invest in the ‘bricks and mortar’ of property within a Super Fund
A super fund can’t borrow, but you can
Negative-gearing on your personal account
Pay down personal debt with nominal tax taken out
Massively accelerate the pay-down of that debt with employer super fund contributions

Your Dream Home at Retirement
Paul & June decide to retire and after years of salary sacrificing and paying off their loans they have a house worth $800,000 and super fund with entitlements of $500,000. (Note: assumed zero growth in capital value of both properties.)

Paul and June can each withdraw $123,808 (2004/05) as an eligible termination payment and pay NO TAX! The balance of $252,384 can also be withdrawn and this would be taxed at 16.5%.

However, Paul & June have now SOLD their old property for $800,000 for which NO CAPITAL GAINS TAX is applicable, as this was their principal place of residence. This is now $800,000 cash, which if contributed as undeducted contributions to their super fund equally between them will provide them a minimum pension of $50,960 and pay no tax.

All the earnings the $800,000 generates in Paul & June’s super fund will be TAX FREE.

What Paul & June CANNOT DO:

They cannot live or rent the bungalow to themselves or any related person
They cannot stay in the bungalow (even for the weekend or holidays)
They cannot purchase the property if it is owned by a related person
The property can have no lien, charge or any form of encumbrance over the property.

What Paul & June MUST DO:

The property be rented/leased out to third party persons on a commercial basis
The property must conform to the investment strategy of the fund
The property must be purchased on an arms length commercial basis
The minutes of the fund need to reflect the decision making process undertaken

Additional Issues
Whilst this strategy may be appealing to many people a number of issues need to be addressed and planned for, and this strategy may not be as appealing when looked at when your personal circumstances are taken into account.

This example is not designed to provide advice, and is merely an example of one possible outcome. Your personal circumstances must be taken into account prior to making any decision. We strongly recommend that you seek advice from a specialist licensed financial adviser prior to making any decision.

Disclaimer:

No investment advice provided to you.
This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any adviser.