Traditionally investment properties have been owned by mums and dads, negative gearing and minimising taxes along the way. But the sting in the tail with that strategy has been when the property was sold. The capital gains tax that applied far outweighed any tax advantages received along the way. The most tax effective structure is one where all taxes are minimised throughout the whole investment. And one that can pay for itself, preferably.
A self managed superannuation fund is such a structure. But until recently, superfunds couldn’t borrow. Well the borrowing rule is here and it’s been working effectively. The most innovative rule change to come to the superannuation environment for a long time is the ability for a superfund to borrow. With Australia’s love for property investment, this has revolutionised the investment property market. Many people have found a breath of fresh air to utilise their own superannuation monies for property investment, even though initially it was thought to be quite costly to borrow through super, the products available have become cost effective.
The negative gearing can be claimed along the way, but the major benefit is when the property is sold. Provided the property is owned for more than 12 months, the maximum capital gains tax rate is 10%. And for some superfunds it can be just as little as Nil%. You can’t ask for a lower tax rate than that and your superannuation contributions can pay for the property. For some, this could be compulsory monies that are contributed, or for others you can voluntarily contribute monies. If you would like to know more about the set up of a self managed superfund or the use of purchasing investment properties through such a structure, then contact Michelle Gargar or Rob McAskill on (07) 55399777 or email robm@munro.com.au
When making any decision in buying property, the main motivation SHOULD NOT be tax, however many people set themselves up to get the “best” tax advantage, without understanding what the real cost will be. When you base your decisions with the “end in mind” attitude, you may change your mind on how you purchase your next investment property.
Let’s assume a typical working mum and dad (approximately 45 years in age) wish to purchase an investment unit worth $500,000 and they are on incomes above $80,000each. If they structure their finances correctly, using the current equity in their home, they could borrow 100% of this amount and maximise their interest deductions. Assuming typical costs of rates, body corporate, commissions, maintenance and interest, it may derive a negative geared position of say $25,000. They may reduce these costs by reducing their personal tax by $10,500. Therefore, there will be a net cost to mum and dad of $14,500 per year, $279 per week. This is money that comes out of their cash flow.
Let’s assume they hold the property for 10 years, and the property grows in value by 5% each year. This means that they could derive approximately $800,000 after selling costs. This makes a capital gain of $300,000 and after the 50% discount, a taxable gain of $150,000. Assuming they are on the same tax rate when they purchased the property, the capital gain tax will cost them $62,250. They will have to be careful the capital gain doesn’t push them into the next tax bracket.
So their total out of pocket costs were approximately $210,000, which reduces their net gain to only $90,000 overall.
An alternative
What if they used their superannuation funds to borrow and purchase the property, using the ability to borrow through a self managed superannuation fund? This way they are utilising their own superannuation monies as the deposit, and effectively they borrow less, which reduces the overall interest costs.
Assuming the same costs, but a reduction in interest cost, the overall costs to the fund each year would be approximately $12,500. Assuming there are taxable contributions going into the fund, the tax saving each year would be $1,875. So the net cost to the fund would be $10,625 each year. The yearly costs are coming from the superannuation fund and from the contributions being paid into the fund. So no out of pocket cost to mum and dad.Once again, assuming they hold it for 10 years and make the same profit of $300,000, the capital gain tax would now be only $30,000 within the superannuation fund.
The real bonus is if mum and/or dad can enter into a Transition to Retirement Income Stream (TRIS) within their superannuation fund before they sell the property, because they could eliminate the capital gain tax to $Nil.
Overall, the property costs only $136,250 inside the superannuation fund, or their total net gain on owning and selling the property would now be $163,750. This would increase to $193,750 if they were in a TRIS. This is in their retirement fund waiting for them to retire on.
With the “end in mind” I’d recommend a property be owned by an entity where you get the highest net gain in your pocket. Even if that pocket is being set up for your future. If you would like to discuss how to structure your next investment property purchase to maximise your net return, contact Michelle Garagr or Rob McAskill on 5599 9777 or email robm@munro.com.au.
Michelle Gargar ©2010
Review of the Australian Tax System – What does it mean for your Superannuation?
Australia has recently undergone two major reviews of its taxation system: the Henry Review has been reviewing taxation overall; the Cooper Review has been focused on Superannuation specifically. Many saw this as a great opportunity to streamline and simplify our current taxation regime by implementing some major changes.
Even though the findings and recommendations of the Henry & Cooper Review have now been published, the Australian Government is still to advise the extent to which it will implement any of these recommendations. The Cooper Review has recommended a review into Superfund’s holding collectables such as wine and artwork, and also limiting investments with related parties.
What has come as a great sign for investors with money in Super is that the Government has not been recommended to change the rules that allow Self Managed Superannuation Funds to borrow to invest in property, as long as the Investment Strategy of your Superfund allows for the investment. Superannuation continues to be the most concessionally taxed environment within the Australian Tax System and long term investors need to consider the benefits of holding a property in this environment. With the housing shortage starting to hit Queensland and shortfalls in regional areas doubling over the last twelve months, causing a reliance on the rental market, a great opportunity is being created for investors looking to diversify their portfolio.
At Munro Accountants we can assist in establishing the necessary vehicles to allow you to borrow through your Superfund to build your portfolio. Contact Michelle Gargar or Rob McAskill at Munro Accountants on 07 5539 9777 or email robm@munro.com.au
The numbers add up to use your SMSF
As at March 2010, the number of Self Managed Superannuation Funds (SMSF's) had risen to over 420,000, with total assets in excess of $400 billion invested. What is interesting is the increase in residential and non residential property investment over the last 5 years. In 2005, property made up 11% of total funds invested. In 2010 it represents 14% of total funds invested. In dollar terms, this increase represents an additional $37 billion invested in property over the last 5 years. Whilst shares have dropped by 2% invested over the last 5 years this tells us that confidence in investing in property is increasing and more people see the sense in property as their long term investment opportunity.
This increase would also have been as a result of the current opportunity for SMSF’s to borrow to invest in property.With the current housing shortage starting to increase the rental returns for investors, there’s never been a better time to consider accessing your superannuation monies to develop a property portfolio.
ContactiMichelle Gargar or Rob McAskill on 07 5539 9777 or robm@munro.com.au
©Michelle Gargar 2010
Typically when looking at buying an investment property, a couple would generally enter into a contract as “joint tenants”. Automatically this means the property is owned 50/50 so all income and expenses are shared equally. This also means that the property derives an equal capital gain to each person when sold.
On the death of one of the owners, the ownership of the property will automatically be transferred to the other owner. Your “will” cannot direct the property ownership to be distributed otherwise. In the event this couple is in their first marriage (and deeply in love) it may not be a big deal. Although should there be a blending of the family and one owner wishes to “will” their portion to another family member, then it would be best to structure the ownership as “tenants in common”.
“Tenants in common” gives you the option to state in what portion you wish to own the property. You could still own the property 50/50 or even 99/1. All the income, expenses and capital gains are then split in those proportions. This is not done on the contract, but on the title registration document your solicitor prepares.
What has typically happened in the past was that the higher income earner of the couple would buy the property 99% to 1% for the lower income earner. Whilst this assisted in claiming most of the negative geared loss in the higher earners tax bracket, it meant they paid the most tax on the capital gain. So it is imperative you seek advice correctly before signing contracts when buying an investment property, to ensure it is structured correctly.
We assist many clients who do not even reside in the country in structuring their investment property purchase. If we can assist you, call our office on (07) 5539 9777 to make an appointment or email robm@munro.com.au
