Tax changes put property in SMSF portfolios

Tax changes next year to superannuation will favour commercial property investments in self-managed superannuation funds (SMSF).

Thomson Playford partner Stephen Heath said the proposed tax changes will allow investors to retain property in their funds and use rents for income.

“There are several major changes to the taxation treatment of superannuation that are particularly relevant to commercial property investment that makes it more appealing to mature investors,” he said.

“Under the [proposed] Budget changes, there will be a new generation of pension arrangements available from July 1, next year, that will allow commercial property investment rents to meet pension payment obligations.”

Heath said now that Reasonable Benefits Limits will be abolished the tax-effectiveness of commercial property no longer runs out as soon as an investor’s assets reach a certain level.

“There are now enhanced opportunities to fund an asset such as commercial property from one generation to another without attracting CGT [capital gains tax],” he said.

“If handled correctly, wealth creation strategies could be devised to allow commercial property investors to invest in real property through their SMSF in a tax-exempt environment.”

Knight Frank South Australia managing director Don Crouch said commercial property yields are closer to 7 to 8 per cent while residential yields were about 4 per cent.

“In the past, tax treatment of these higher yields and the higher costs of commercial property have acted as disincentives for individual superannuation investors,” he said.

“It appears the changes in the tax system will address these concerns.”

With individual SMSFs growing to around $1 million to $2 million in funds, Heath said investing in commercial property was more realistic for many investors.

Crouch believes the looming changes will lead to a strong flow of superannuation monies into commercial property.