Today, we’ll explore the story of a 50-year-old single investor planning financial stability by purchasing a property in New South Wales (NSW) through their SMSF (Self-Managed Super Fund). Using a high annual income and unused concessional contributions, this savvy investment strategy aims to achieve long-term tax benefits and asset growth.
About the Investor: Current Situation
- Age: 50 years old
- Income: Annual salary of $160,000
- Existing Debt:
- Owner-occupied home loan: $400,000
- Investment property loan: $600,000
- Superannuation Balance: $300,000
- Additional Super Contribution Plan: $60,000 to be contributed this year using unused concessional contributions
At 50, it’s time to seriously prepare for retirement. The investor decided that now is the perfect time to secure a stable income source and tax benefits for the future by investing in property through their SMSF.
Investment Plan: Purchasing an NSW Property
The investor plans to purchase a property worth $800,000 through their SMSF. Below are the main details of the investment plan:
- Purchase Costs:
- Purchase price: $800,000
- Deposit: $350,529 (from the superannuation balance)
- Stamp duty and other costs: $30,529 (based on NSW rates)
- Total upfront cost: $381,058
- Superannuation Balance Usage: After covering all costs, most of the super balance will be invested in the property, securing a tangible asset.
Expected Benefits from the Investment
Tax Savings
The investor plans to contribute an additional $60,000 to their super this year to fully utilize unused concessional contributions. This will result in an expected tax refund of approximately $18,000 by reducing taxable income under the lower SMSF tax rate of 15%.
Capital Gains Tax (CGT) Exemption
Assets purchased through SMSF are exempt from CGT when sold during the Pension Phase.
- Estimated Holding Period: 20 years
- Asset Value After 20 Years: $800,000 → approximately $1,752,000 (assuming 4% annual growth)
- CGT Exemption Benefit: Approximately $952,000 in tax savings
Tax-Free Rental Income
During the Pension Phase, rental income from SMSF properties is tax-free.
- Expected Rental Income After 20 Years: Current annual rent of $32,000 → approximately $57,000 per year (assuming 3% annual growth)
This tax-free rental income can serve as a reliable source of retirement income.
Additional Benefits and Considerations
- Portfolio Diversification: Adding real estate to the SMSF enhances portfolio stability and ensures long-term growth potential with a tangible asset.
- Long-Term Financial Stability: Tax-free rental income and asset disposal can provide a stable income during retirement.
- SMSF Operating Costs and Loan Risks:
- Operating Costs: Approximately $3,000–$6,000 per year
- Loan Interest Rates: Typically higher than regular loans, requiring a solid repayment plan
- Liquidity Risks: Most of the super balance is tied up in the property, so planning for liquidity issues is essential.
Conclusion
This case demonstrates an ideal strategy for a 50-year-old single investor using a high income and unused concessional contributions to grow assets through SMSF. The three key advantages—CGT exemption, tax-free rental income, and tax rate reduction—create a strong foundation for long-term retirement stability.
Tip: Since SMSF investments involve complex regulations, it’s crucial to consult with professionals to create a detailed plan.