Super or property?

Superannuation has long been a regulatory nightmare. For many people, choosing between superannuation and property investment for the more effective wealth creation vehicle can be a confusing experience.

Over the last five years, changes have been made to simplify superannuation rules, offering some very generous bonus conditions for workers. One of these changes included the opportunity to make extra and un-deducted contributions of up to $450,000 to your superfund over a period of 3 years for those under the age of 65.

This offered an excellent opportunity for people to invest money into their future retirement. But what is the best option when comparing this with property investment?

A super strategy:
What are the key issues when considering superannuation as a wealth creation strategy?

  • Tax-free redemptions
    Superannuation redemptions are tax free for those over 60 years old. Additionally, these redemptions do not have to be treated as assessable income, ensuring income from other sources are taxed at a lower marginal rate

  • Low or no tax on fund earnings
    Investment earnings are taxed at a maximum rate of 15 percent. On the other hand, earnings outside super may be subject to tax as high as 46 percent. This is significant when you consider the after tax position of either option.Furthermore, where superannuation benefits are rolled over to an allocated pension, earnings are then tax free.

  • Salary Sacrifice
    Employees have the opportunity to make significant tax savings by salary sacrificing more into super to the annual limit on tax- deductible super contributions.
    Salary sacrifice contributions are taxed at 15 percent when it is received by the superannuation fund. Employer contributions, including salary sacrifice, of more than $25,000, or $50,000 for those over 50 years old, is taxed at 46.5 percent. The disadvantage of salary sacrificing is the fact that money contributed to super can’t be withdrawn until you reach your preservation age and retire. This is not a great concern for someone in their 50s because this group has a major motivation to salary sacrifice as much as possible.

  • No contributions tax
    Property investors that sell a property and place the after capital gains tax proceeds into a superannuation fund (called the “non-concessional contribution” or after tax contribution), can contribute $450,000 over three years.

Property

  • Flexibility
    Once your money is locked into your superannuation fund it cannot be accessed until you reach what is known as the ‘preservation age’. Preservation age can range from 55 to 60, depending on the year in which you were born.
    Another downside of superannuation is that you cannot use the money as security to borrow funds for any other purpose. Funds are basically quarantined.
    Property on the other hand is more flexible in the sense that it can be sold to meet personal financial obligations. In many respects it is a lower risk vehicle for individuals who circumstances may change suddenly, such as having a family.

  • Property as leverage
    Property investing is a method of wealth generation, distinct from superannuation. In principle, most wealth generation initiatives involve financial leverage or gearing (using borrowed funds) to acquire additional capital growth assets from the equity generated in your existing portfolio. Property, more often than not, serves as the basis of security to borrow additional funds to acquire
    assets, provided that obligations on investment loans are maintained.

  • Capital gains tax benefits
    Many individuals are using a self managed super fund to purchase property, on the basis that this will provide a means to minimise capital gains tax if the property is sold. Whilst there is an argument for this approach, there is a downside. Property held in a superannuation fund cannot be used as security to leverage an expanding property portfolio. As a result, there are opportunity costs associated with not expanding a property portfolio in order to take advantage of CGT benefits. The forfeited commercial gain may more than offset any tax saved.

  • Tax deductible expenditure
    Wealth generation takes advantage of leverage to accelerate the net worth of individuals by the effective selection of capital assets and taking advantage of taxation benefits that accompany the borrowings for the asset acquisition. Property investing has some generous taxation concessions that allow taxpayers to claim cash and non-cash losses on annual property expenses as tax deductions off their primary income sources.
    Deciding on a strategy of superannuation or property to build wealth requires some consideration, taking into account age, personal circumstances and income. Please feel free to contact our office to discuss any of these issues and how they make impact your wealth creation strategy.

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