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3 Reasons SMSFs Invest in Commercial Property

18 June, 2019
Categories: Commercial, Investments, Superannuation

Over a million Australians use a self-managed super fund to secure their retirement. With numerous investment options available, why are so many SMSF investors turning to commercial property?

The majority of our investors use a self-managed super fund to invest alongside us. Why? Well, the “do-it-yourself” approach to super seems to go hand in hand with commercial property investment.

SMSF investors like commercial property for the same reasons we do:

1. It’s tax effective

2. It outperforms top regulated superannuation funds

3. It’s a safe investment avenue

If you’re a retiree or your twilight years are in sight, this one’s for you. Let’s dive deeper into why SMSF investors are turning to commercial property.

1. Tax effective structure

An SMSF’s tax effective structure is one of the reasons over a million Aussie investors use an SMSF to hold their investments.

Those nearing retirement have a reduced ability to earn significant income from working, so they want bang for buck on the dollars they earn. This means they want an investment that is tax savvy.

SMSF investors get a couple of “kick-backs” to reduce their tax bill from a commercial property investment:

Pay less income tax

Earnings from an SMSF are taxed at a flat concessional tax rate of only 15 per cent. Much lower than most marginal income tax rates.

And when an SMSF member reaches 60 years’ old and retires, or after a member’s 65th birthday, any income from their SMSF will be tax-free.

How’s that for a birthday gift.

Pay less capital gains tax

Generally, the “reward” from a smart investment is offloading a portion of your profits to the taxman when selling the property. The higher your profit, the more tax you pay.

For those without an SMSF, capital gains are taxed at their marginal income tax rate. If you’re a middle-income earner, this could be around 32.5 per cent.

But SMSFs get special treatment.

The current legislation says commercial property held in an SMSF for over 12 months is only exposed to CGT of 10 per cent. This can save certain SMSF investors up to 20 or even 30 per cent of capital gains tax when they sell the property.

Tax Example: SMSF vs no SMSF

Let’s say you and your friends invested alongside a commercial property syndicator.

You all invested the same amount in a commercial property for four years until it was sold. Except you used your SMSF.

After the property sale, you received before-tax profit of $200,000 (after fees, etc). With your capital gains taxed at only 10 per cent, only $20,000 of your profits were shipped off to the ATO.

You kept $180,000 with your SMSF.

Meanwhile, your friends who missed the SMSF memo had their profit taxed at their marginal individual income tax rate of, say, 37 per cent.

Because the property was held for more than 12 months they could apply the 50 per cent CGT discount to the $200,000 before-tax profit (i.e. only $100,000 of the capital gain is taxable), they sent $37,000 to the taxman.

So, your friends with no SMSF only kept $163,000.

This is a very rudimentary example. But a side by side comparison gives $17,000 worth of reasons why these fictional friends might think about using an SMSF to invest in commercial property.

2. Outperforming regulated superannuation funds

Early in 2019, the AFR revealed the top 2018 super performers from a study by research group Chant West.

It showed government regulated growth super funds only offered total annual gross returns of 2.8 per cent and below in the 12 months to December 31, 2018. And the median growth in 2018 of all funds on the list provided total gross returns of 0.8 per cent.

Remember, these are the top performing superannuation funds. Barely beating term deposit rates in a bank.

So, why doesn’t commercial property held in an SMSF get a mention among these top performers?

Returns from commercial property

Another AFR article in 2019 showed industrial and office property gave investors respective total gross returns of 14.8% pa and 13.7% pa in the 12 months to December 31, 2018.

Hardly a competition between commercial property and super returns.

Generally, retirees like cash flow positive investments. And that’s what they’ll most likely get from commercial property. Rental income is higher than finance repayments and expenses, and leases run for multiple years.

Positive cash flow and solid return performance are major reasons so many SMSF investors are turning to commercial real estate to secure their retirement.

3. Safe investment avenue

The wrong environment can be detrimental to investor return, especially when retirement is looming and stability is vital. So, it’s important to pick the right investment mix.

The stock market is known for its volatility because shares prices can literally move overnight. And that’s an uncertainty most conservative investors don’t want. Meanwhile, low returns from deposits, residential property and retail super funds are causing retirees to look elsewhere to place their savings.

SMSF investment into commercial property might be the better environment for some investors:

Politically safe: Australia’s financial watchdog, ASIC, gives SMSF members comfort that their nest egg should be safe to stand the test of time.

Economically safe: Commercial property isn’t immune to economic cycles. But long leases allow investors to forecast rental income and growth with enormous amounts of certainty.

Environmentally safe: Did you know Australia has the second most transparent real estate market in the world? Measures of investment performance, as well as its regulatory and legal systems, are world-class.

How can your SMSF invest in commercial property?

Investing in commercial property can be complex for most individuals. But there’s an alternative to investing alone: investing alongside an experienced commercial property syndicator.

Professional syndicates allow both experienced and first-time investors to leverage from a property expert’s knowledge, network and performance.

For more information on how you can secure your investment alongside us and create wealth for your retirement, get in touch with Properties & Pathways today.


If you liked this post, watch our video on SMSF investment in commercial property:


The examples used in this blog post are fictional. Properties & Pathways does not suggest profits in any of its syndicates (or any other syndicates of unrelated parties) will be in any way similar to those mentioned in this blog post. Past performance is not indicative of future returns. Any investment comes with risk.

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