The New Superannuation Rules and Property Investing – Is It Either/Or

Are you confused about the new Superannuation rules and how it affects you as a current or potential property investor?

I trust this article will help you demystify where Superannuation may fit into your planning for retirement.

Firstly, Superannuation is a method of forced savings. It is like another bank account for you, but it has limitations as to how and when you can access the funds saved up, and the taxation treatments of those savings. The Federal Government recognised long ago that it could not afford the Aged Pension, as the advances in medical technology meant that people are living longer.

Enter Superannuation. It has long been a regulatory nightmare, hence the rise and rise of the Financial Planning industry, trying to help people through the regulations to come up with the best result for the potential retiree. Recent changes simplifying the Superannuation rules come into effect on July 1 2007, with some very generous bonus interim conditions in the 2006 financial year.

Basically, after you turn 60 the new rules make Superannuation redemptions after July 1 2007 tax free. Now even better is that these redemptions do not have to be declared as income, so any other income sources you have will not have Superannuation redemptions forcing you into higher marginal tax brackets or included in the tax free threshold.

Before you reach the age of 69, the Government will allow you to make additional contributions into Super apart from the standard 9% Employer Contributions (called “concessional contributions” or before tax contributions). If you are under 50, you can salary sacrifice an additional $50,000 into Super per year, and if you are over 50, you can salary sacrifice up to $100,000 per year for the next 5 years. All good!

For property investors that sell a property and place the after capital gains tax proceeds into Super (called the “non-concessional contribution” or after tax contribution), you can contribute $450,000 over three years into Super. All good again!

Once your money is locked into your Superannuation account with whatever licensed Superannuation Fund, you cannot access the money until you attain age 55 if born before June 1960, and age 60 if born after June 1964. Nor can you use the money in your Superannuation account as security to borrow funds for any other purpose. The money is effectively quarantined.

But the question remains! Should you put spare money into Super, or buy an Investment Property?

Now I am not a Financial Planner and am not qualified to give you retirement planning advice, but there is one thing you should know.

Most Financial Planners are not licensed Real Estate agents, and as such are not commissioned on real estate transactions. Financial Planners obtain commissions on the investment value they place with their accredited Funds. So in some cases their advice may be biased towards the asset classes from which they can attain commissions, like Superannuation Funds or Managed Funds. This is just human nature. Why recommend something from which you cannot make any income? At OzInvest, we are licensed Real Estate Agents, and as such we have no expertise is any other investments, and cannot recommend them but however recommend our clients to visit a Financial Planner for the appropriate advice about classes of assets they are licensed to transact.

Real Estate investing is a method of wealth generation, and hence is distinct from Superannuation. As a Real Estate investor, you receive a Certificate of Title to your property, your piece of Australia. No one can take that away from you unless you do not meet your Investment Loan obligations, and the only people licensed to transact these are licensed Real Estate Agents. As a general rule, any wealth generation initiatives you engage in should be maintained outside of Super, as the basic principle of wealth generation is to use financial leverage (other people’s money) to purchase additional capital growth assets from the equity generated in your existing portfolio.

Many accountants are now advising clients to use Self Managed Super Fund (through a Unit Trust) to purchase a property, as this will provide a means to minimise Capital Gains Tax if the property is sold. The catch here is that you will not be able to use that property as security for future leverage of your ongoing portfolio, so the future CGT benefits may cost you more than the small amount of tax you may save.

Wealth generation utilises leverage to accelerate the net worth of individuals by the careful selection of capital growth assets and the proper utilisation of taxation benefits that accompany the borrowings for the asset acquisition. Property investing has extremely generous taxation benefits by allowing taxpayers to claim cash and non-cash losses on annual property expenses as tax deductions off their primary income source/s.

As an example from my personal property investing, I bought my first property in Greystanes, a western Sydney suburb, in 1975 for $25,000 with $3,000 cash deposit. That property is now worth over $420,000, a capital gain of $395,000 on my $3,000 cash invested over the 32 years of the investment. Now if I had invested that $3,000 cash 32 years ago in Super at say an annual return of 7.2% compounded, I would now have just over $25,000 in my account. Can you see the incredible acceleration of returns the leverage of purchasing an appreciating asset like real estate (with the Bank’s money) provides?

Lets use some examples that may help.

Example 1: Young married couple aged 35, 2 children, own their own home with $200,000 equity and have $850 per month available for investing.

With potentially 30 years to go to retirement, wealth generation could be the preferred path, which means investing the $850 per month outside of Super may maximise their potential. Real Estate could be the safest long-term option, as the down cycles in Real Estate are not as severe as some other more risky investments. But a portion of the available funds into Super may provide a healthy balance, so it is not one or the other, but perhaps both.

Example 2: Married couple, aged 57, empty nesters, 10 years from retirement, own home with no debt worth $700K, good incomes.

Again a combination of both may be the right choice, but with 10 years left to retirement, good investment properties have historically doubled in value over this period. So predominantly investing in real estate may be best, with some into Super depending on available cash. With so much equity and good income possibly 3 properties worth around $350K each (providing their income can sustain the $1,500 per month net outgoings after tax benefits) will provide them a potential $1mil in capital gains before CGT in 10 years time. If the sale of the properties is staggered after their retirement year, CGT will be minimal providing there are no other income sources for the year. (Don’t forget that Super redemptions no longer go into your tax returns.) You may also like to check with your Accountant as to whether purchasing through a Self-Manager Super Fund may work in this instance.

In summary, Real Estate Investing still provides the most exceptional opportunity for wealth generation using other people’s money, and Super now provides a simple and tax effective solution for forced savings.

So the answer to the question “Should I invest in property or super” is probably “Both!”. It is a question of degree based on your current circumstances and future plans.

Disclaimer: Nothing in this article can be construed as financial advice. All statements in this article are for information purposes only and you are advised to check any statements made here with your own financial advisers as to their appropriateness for your personal circumstances.

Writer’s Bio

Geoff Stroud is the author of The Shocking Truth Reports and the Sales & Marketing Manager of Ozinvest Pty Ltd, a long term supporter of property investors in Australia. Ozinvest Pty Ltd provide brand new house and land package deals in rising markets and offer themselves to property investors as the primary tenant for 10 years at fair market rental value through a leaseback agreement. No OzInvest client has ever lost one day of fair market rent during the period of their leaseback agreement. http://www.ozinvest.com.au