We’re diving into part five of our series on the six reasons why people invest in property through their superannuation. Today, we’re exploring an exciting but often overlooked benefit: using employer contributions to pay off investment property loans.
How It Works
When you purchase a property through a self-managed super fund (SMSF), all associated payments and costs—such as mortgage repayments, maintenance, and property management fees—come directly from the super fund itself. This is a significant advantage because it means you’re not dipping into your personal savings to cover these expenses.
Two Primary Funding Sources
- Rental Income: Once your SMSF acquires an investment property, it’s typically rented out at market rates. The rental income generated from the property is deposited directly into your SMSF. This income can be used to cover the ongoing costs associated with the property, such as mortgage repayments, property management fees, and maintenance expenses.
- Employer Contributions: In Australia, employers are required to make regular contributions to their employees’ superannuation funds. The Superannuation Guarantee (SG) rate is currently set at 11%, which means your employer is contributing a portion of your salary to your super fund regularly. These contributions accumulate over time and, when combined with rental income, can be used to pay off the investment property loan.
Employer Contributions: Past, Present, and Future
Employer contributions, also known as superannuation contributions, have been a cornerstone of Australia’s retirement system since the introduction of the Superannuation Guarantee (SG) in 1992. Initially set at 3%, the SG rate has gradually increased over the years, reflecting the government’s commitment to ensuring Australians have sufficient savings for retirement. As of 2024, the SG rate stands at 11%. This means employers are required to contribute 11% of an employee’s ordinary time earnings into their superannuation fund.
Looking ahead, the SG rate is set to continue rising incrementally until it reaches 12% by 2025. This steady increase in contributions is designed to bolster the retirement savings of Australians, providing a more secure financial future. For those investing in property through their SMSF, these contributions play a vital role, as they are one of the primary funding sources used to pay off property loans. Over time, as the SG rate increases, so too will the potential for these contributions to significantly impact the repayment of SMSF investment property loans, making this strategy even more powerful in the years to come .
The Power of Combined Income Streams
The combination of rental income and employer contributions makes it possible to pay off your investment property loan without tapping into your personal finances. This dual funding approach is what makes investing in property through your SMSF so appealing. Essentially, your tenants and your employer are contributing to building your retirement wealth.
Tax Efficiency and Long-Term Growth
Another critical point to consider is the tax efficiency of this strategy. During the accumulation phase, rental income generated within your SMSF is taxed at a maximum rate of 15%. This is often lower than your marginal tax rate. Furthermore, once your SMSF moves into the pension phase, the tax on income, including rental income, drops to 0% .
This strategy helps you pay off your property more efficiently whilst leveraging tax savings to boost your retirement funds.
Why Property Through Super?
Employer contributions can help pay off your investment property loans. This is a smart way to grow your retirement wealth without additional strain on your personal finances. It’s an efficient, tax-effective strategy that allows you to maximise the benefits of your superannuation while securing your financial future. Next, we’ll discuss the benefits of gearing within your SMSF. Until then, stay inspired and keep building your wealth!
Information from Teach Me About Property is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
