Q I’m 71 years old, can I put a large sum of into my super fund to purchase an investment property?
A As you are 71, in the first instance you must satisfy a work test to be eligible to contribute to Superannuation. For those over 65 you need to be in gainful employment for at least 40 hours in a consecutive 30 day period in the financial year prior to making the contribution to Superannuation.
If you are eligible to make contributions, you are limited to $180,000 of personal contributions per financial year. These are referred to as Non Concessional contributions. As these are contributions from after tax dollars, they are contributed to the fund without incurring contributions tax because a tax deduction is not being claimed.
If you are entitled to claim a tax deduction as a self-employed person or you are employed and eligible for Superannuation Guarantee Contributions or Salary Sacrifice contributions, the limit is $35,000 as a Concessional Contribution per financial year. Concessional Contributions will incur contributions tax at a rate of 15%.
Each cap operates independently, so provided you are eligible, you could contribute up to $215,000 into Superannuation. However, you should be aware that Concessional Contributions made above the relevant cap ($35,000 per financial year) will count towards your Non-Concessional Contribution cap.
Note there are harsh tax penalties for exceeding the Contribution caps. Since 1 July 2013, excess Concessional Contributions are treated as assessable income and taxed at the individuals marginal tax rate. Legislation was passed last week (awaiting Royal ascent) that enables excess Non Concessional Contributions to be returned to the member without tax penalty. This relates to excess Non Concessional Contributions made to a fund since 1 July 2013.
In the first instance, at age 71 you would need to consider if buying an investment property is appropriate to your personal circumstances. Will it provide you with the income you need, the asset diversification and the flexibility to make changes as your circumstances dictate?
If you wish to buy an investment property within Superannuation, you would need to establish a Self Managed Superannuation fund (SMSF). There has been considerable debate in the industry as to whether owning residential property within a SMSF is appropriate. According to the ATO, in September 2013 only 3.5% of SMSF assets were invested in residential property. Residential property inside Superannuation suits a very limited range of clients.
Here are a few reasons why:
Apart from the restrictions on making contributions to a Superannuation fund, there are important legal restrictions in relation to dealing with a property in an SMSF. An SMSF property purchase must be at arm’s length and transactions must be at market rates. You cannot transfer in residential property you currently own, you cannot use the property nor live in the property. Neither can any family or friends.
If you require finance to purchase the property within the SMSF, you will require a larger deposit, at least 20-30% and the interests costs offered by the banks are typically higher.
You cannot renovate or improve the value of the property within an SMSF beyond basic repairs and maintenance if finance is involved.
You cannot negative gear the property. Income losses are offset against other earnings to the Superannuation fund. All costs associate with the property must be funded from within the Superannuation fund itself.
Investing a large portion of your Superannuation nest egg in one asset reduces your investment diversification and exposes you to greater risk should that asset underperform.
Assets used as security for a loan cannot be used to provide for an Allocated Pension. Put simply, if you wish to establish an Allocated Pension, the assets to be used to provide the pension must be unencumbered.
If you buy a property unencumbered and you transition the fund into an Allocated Pension, you will need to ensure you have sufficient liquidity within the fund to meet Allocated Pension payments. For example, at 71, you are obliged to draw 5% of the asset value of your fund as income from your fund. Will the rent on the property provide sufficient income net of costs to meet this obligation on an ongoing basis? As you get older the percentage draw rate increases, how do you propose to fund this obligation?
You need to ensure you understand what you are doing. As a trustee of a SMSF, you bear full responsibility for the ongoing management and supervision of the fund. The legal requirements in owning Residential Property within a SMSF add additional complexity and expense to the process.
Given all of the above and given your age, frankly it hardly seems worth it.