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Property v Super (SMSF's & Property)

Monday, March 07, 2011

Is the Age Old Battle between Property & Superannuation finally over?

Why is there a war?


Since time immemorial it has been argued by numerous opponents as to whether the benefits of investing in property outweigh the tax concessional environment of superannuation. 

From a cynic’s point of view, one could say that the opponents opinion’s debate varied considerably depending on their own bias.  And this bias seems to be greatly influenced by the advisor’s commission structure. 

Funnily enough, analysis provided financial advisors proved, without a doubt, that superannuation and shares is the way to go whereas just as convincing arguments, raised by property spruikers, real estate agents and mortgage brokers, suggested that property was by far the superior investment.

Who should you believe? 

A new battalion – property and superannuation join forces?


The battlefield has changed and changed dramatically. 

Why would you choose;

Property instead of Super

Or

Super instead of Property

When you can have the best of both worlds instead.

Why has the front line shifted?


New laws introduced in September 2007 allow Self Managed Superannuation Funds (SMSF’s) to, for the first time, buy geared property in a simple and uncomplicated manner. 

SMSF’s can now select a property of their choice, be it;
·         residential
·         commercial,
·         or rural
and borrow up to 75% of the value of the property. 

Previously an investor had to choose between;

·         using his spare funds to invest in a negative geared property,

·         OR contribute the funds to superannuation.  Let’s have a look at an example comparing the two alternatives.

For advice, assistance and to get started with Property and or SMSF go to www.wfscanberra.com.au

Comparing the two – Option 1:



Take Johnny who is 35 and purchases an investment property.

Presuming average capital growth of 7% and rental yield of 5% (both very achievable) the following scenario occurs at age 60.

Value of Property:  $1,775,328
Mortgage owing: $350,000
Net Value: $1,425,328


Plus, the property has been cash flow positive since year 7 netting a cash flow of $584,480 which Johnny could use for further property investing.

Taking tax out of this amount will bring the returns down to:
Net Capital Gain: $1,211,529
Net Cash flow: $409,136
Overall Outcome: $1,620,665

(*Presuming a 30% tax rate,8.5% IO Mortgage rate,rent yield grows at 6% in line with property growth, excess cash flow taxed)

Comparing the two – Option 2:


Compare this to Sally who invests the same amount as Johnny into superannuation. Presuming the same growth and yield (if his superannuation was invested in a well diversified growth portfolio) he would achieve a superannuation balance of $432,658 by age 60.  This is well short of the gains made by Johnny.


(*Presuming a 15% tax rate, contributions include the initial deposit and the cash flow shortfall and cease in year 7 when property cash flow positive, no CGT as investment held until after age 60)

Comparing the two - An un-biased opinion


As any professional advisor and serious investor should know there is more to consider than the pure numerical outcome.  Whether considering property or superannuation other important factors need to be considered. 

One of the most important factors is the stage of the investor’s lifecycle. 

In the working years of an investor’s life a strong cash flow allows the possibility of using gearing strategies to maximize returns thus making property a preferential option. 

Once the investor reaches the pre-retirement phase, it may be unwise to take on the risk of gearing.  Therefore, this may be the preferential time to consider locking away as much as possible into super.

The most common investment strategy seen in the baby boomer era was to invest all surplus funds into accessible investments including property and shares and then cashing these in and contributing the funds into super just prior to retirement.  The only disadvantage of this strategy was a potentially very large Capital Gains Tax bill.

Who shot this strategy down?


However, this strategy has been dramatically hampered by the Governments new contribution rules which only allow $25,000 a year (and $50,000 a year if over 55) of concessional contributions per year.  

The effect of the new contributions rule is to significantly disadvantage generation X and Y.  It is fair to say that most young singles and young families have better things to do with their money and more pressing needs than to make the most of their $25,000 per year contribution limit.  Then when they are getting closer to retirement and have more surplus funds they will be prevented from, like their pre-decessors, making large contributions just prior to retirement.

So taking the above example a little further let’s suppose Johnny sold his property at age 60 with the intention of rolling the funds into superannuation. He made a gain of $1,425,328.  Capital Gains Tax will be incurred on the sale bringing his net gain down to $1,211,529.  Can he contribute this to his super fund?

Under the current rules he will only be able to contribute $50,000 as a concessional amount (that is; tax deductible) and $100,000 as non-concessional.  Anything over this will be taxed at 48.5%.  If the current rules still apply when Johnny is 60 he may be able to bring forward three years worth of contributions and contribute $450,000 in one year.  This will still leave $761,529 outside the super fund that he is prohibited from contributing. 

So what does this mean?


What the above analysis means is that the age old argument of super Vs property is superfluous.  It is redundant and advisors and investors alike need to re-consider their strategies.

The contributions restrictions require investors to consider super much sooner than later.  And the new borrowing rules within SMSF’s open up a whole gamete of possibilities. 

Following on from the above example:


Johnny already has $50,000 in his retail super fund selected for him by his employer.  He chooses to roll this over to his own SMSF and use that to pay a deposit and purchase the investment property in the SMSF.  Instead of paying the negative gearing shortfall personally he instead salary sacrifices this amount to his super fund to enable the super fund to meet the mortgage commitments.

At age 60 Johnny has accumulated the same gain on the property as above, that is; $1,425,328 but he can now sell the property Capital Gains Tax Free (assuming he is on a pension).  The positive cash flow from the rental income has also been taxed at 15% instead of 30% netting him an additional $64,150

The total gains from simply
holding the property in his
SMSF instead of personally
are over $277,949.

And of course he could have used the positive cash flow to fund another 4 or 5 properties increasing the gain to well over a million.

For advice, assistance and to get started with Property and or SMSF go to www.wfscanberra.com.au

Why would you buy property in a SMSF instead of personally?


For many reasons including;

  • you get the benefit of ‘leverage’,
  • a maximum of 15% tax on any rental income in excess of costs,
  • you receive a tax deduction for the loan repayments of principal (which is normally impossible) via salary sacrificing the amount required to cover the shortfall,
  • asset protection – the asset is protected from creditors in the event of a lawsuit or bankruptcy (some conditions apply),
  • the property can still be sold and the loan repaid at any stage,
  • any capital gains on the property when sold will be taxed at a maximum rate of 10% (if asset held for more than 12 months)



But the biggest incentive of all – if you keep the properties until age 60 and commence a pension from the fund;
·       any capital gain on the property will be TAX FREE,
·       any rent on the property will be TAX FREE,
·       any income paid out to you will also be TAX FREE.


The laws are only new and law complying products are now being introduced and marketed.  It is envisaged that these products will hit the market like a storm once investors realize the potential.  There are already over 350,000 SMSF’s operating in Australia and it is likely that this figure will increase exponentially once knowledge of the loan products becomes widespread. 

In fact, as at May 2010, SMSF’s are growing at a rate of 2500 per month.

It is also interesting to note that this may be the first time in history that all advisors (financial planners, accountants, auditors, property advisors and mortgage brokers) have a common ground for advising clients.  All advisors have something to gain by assisting clients into these products. It’s not only a busy time ahead for advisors but a time to join forces and put a cease fire on the battle.

How to End the War and Live in Peace:


1.          Establish a SMSF – your advisor can do this in 24 hours

2.          Open a bank account with a bank of your choice

3.          Write to your existing funds and request them to rollover your funds to your SMSF bank account

4.          Find a property – recommend that you do this through a buyer’s agency. (See our Free Report as to why)

5.          Arrange a loan through a broker who specializes in SMSF loans.

6.          EASY AS THAT

For advice, assistance and to get started with Property and or SMSF go to www.wfscanberra.com.au

Most importantly GET Proper Advice


Ensure you consult an independent advisor who is licensed to provide Property Investment Advice, qualified and experienced in taxation and finance and regulated by ethical industry associations.

Your advisor should be willing and able to advise you, in writing;

·         How many properties you can afford to buy,

·         Where to buy and why,

·         What returns you should expect on your portfolio,

·         How much will it cost you to hold your properties per week (after tax),

·         How to minimize tax,

·         How to buy – individual name, company, trust or SMSF,

·         Your exit strategy,

·         How to insure your portfolio is safe in the event of any unforeseen circumstances,

·         What will be the ‘end result’ – your exit strategy,

·         And most importantly – will this enable you to achieve your long term income and lifestyle goals in years to come.

For advice, assistance and to get started with Property and or SMSF go to www.wfscanberra.com.au


Yours Sincerely, Catherine Smith
Wholistic Financial Solutions
www.wfscanberra.com.au
02 6162 4546
Bachelor of Commerce / Masters Degree Taxation
Diploma of Financial Planning / Diploma of Mortgage Broking / Diploma of Real Estate / Justice of Peace(ACT)
Certified Practicing Accountant. Fellow of NTAA.
Recognised Taxation Specialist.
Public Accountant.  Tax Agent.
SMSF Specialist.
Training Consultant for Property In A Box
PASSIONATE PROPERTY INVESTOR FOR OVER 20 YEARS

Property Investment Articles

Monday, March 07, 2011

“Here Are The 7 Ways We Can Help You To Reach Your Financial Goals Sooner”

1) We Can Help You Chose The Right  Investment Strategy

We’ll Do It All For You

It’s difficult to choose from the many options available today to property and superannuation investors. We suffer from information overload. With so many decisions to make, it can be hard to make the right choice for you and your family’s future. So how can you minimize the decision-making headaches?
There’s only one way to save yourself the worry of time and money wasting. Let us do it all for you.

We’ll narrow your options with our expert knowledge and experience and pull together unique and innovative strategies tailored specifically for you. You’ll find no-one else in Canberra with the vast range of qualifications and expertise that we have at our fingertips.

You’ll enjoy a service that will:

  • Identify your motivation
  • Identify your goals
  • Identify the best strategy to help you achieve these goals
  • Take into account tax implications
  • Provide a simple step-by-step plan
  • Then keep you motivated and accountable to your goals and plan

Talk with us at Wholistic Financial Solutions and we’ll define your ‘What’, ‘How’, and ‘Why’ for you. We’ll ensure that your goals are clarified and fully understood. After all, this is a lifetime alliance and we want to get it right – right from the start!

2) We Can Help You Get The Finance Needed For Your Investment

Finding the right finance plan/option for your property investment can be a daunting task. So many organizations offer so many products that making the right choice can be like fighting your way out of a tangled maze. You need to find a loan that will give you the best return on your investment, a loan that will not need to be restructured in the future. And you need to save time and money. What to do?
Relax. Our experts at Wholistic Financial Solutions will:
  • Find the right loan for you – simply and easily
  • Set up the right loan structure
  • Plan the right tax strategy for you
  • Tailor the right product to fit your strategy
  • Fill out bank loan applications
  • Guide you through the processes after application
  • Help you the transaction all the way to the settlement of property
We’re not just mortgage brokers. We can bring your tax and financial plans together. And it will all be explained in plain English so you will be completely informed along the way. With our state-of -the-art software, you’ll enjoy the best service available.
You’ll know you’ve made the right choice.

3) We Can Provide Your With The Right Tax Advice

You want to be sure you’re minimizing your tax legally and maximizing your tax deductions. Every person is entitled to pay as little tax as possible and we can promise you you’ll never pay an unnecessary extra dollar of tax.

You’ll get tax advice specific to property investing; the right advice. Our tax professionals will guide you through the solutions to your tax needs. You’ll get:

  • Professional advice from CPA, Master Degree qualified accountants
  • Latest tax law information in our regular newsletters, webinars and seminars
  • An analysis of your tax situation and recommendation as to the most tax effective way to structure the property purchase
  • Recommendations of ways to maximize tax deductions
  • A full, plain English, explanation of the findings of our recommendations
  • Help to implement the right tax strategy
With Wholistic Financial Solution's expert advice, you’ll get answers to any questions you may have. Remember, it’s essential that you have the correct tax strategy in place before you proceed any further. The wrong decision at the crucial purchasing period could cost you very dearly down the track.

4) We Can Help You Find The Right Property So You Can Receive The Highest Return On Your Investment

How many of us can afford the hours it takes to research all the property information available on the current market? Again, there are too many choices to make, too many properties to inspect and too many kilometers to travel. With our busy lifestyles today, not many of us have the time to travel personally to look at investment properties. And it’s next to impossible to fit in with inspection times available, especially if you’ve had to travel interstate. And you certainly won’t want to make a return trip.

So let us source the right property for you, quickly and easily. With our expertise and industry experience we can:

  • Search through property lists to find the property exactly right for you
  • Determine the right strategy and finance plan for you and locate the property that will fit these strategies
  • Undertake “Hot Spot Research” and help you choose locations that may maximise your capital growth
  • Present these choice locations to you
  • Arrange the purchasing process
  • Look after all your management and tax needs
  • Take care of all your post-purchase needs

Imagine how easy it will be to have all this done for you, by people who understand the importance of making the right choice. Don’t ‘run yourself ragged’ by trying to do it all yourself! And remember – we walk our talk.  We will only be recommending areas that we are investing in.

5) We Can Help You With The Right Property Management – No Tenant Headaches

Managing your own investment property can be a real headache. It’s certainly not a job for the faint-hearted, with debt collection, tribunal hearings and possible confrontations with belligerent tenants being just a part of it. For a start, you need to choose the best tenant from several or many applicants; you’ll need to fill out all the paperwork and be prepared to lose money when tenants default on rent payments or the property is left vacant for any length of time.
It’s an endless round of thankless responsibilities. Then there’s maintenance and the repairs to any damage that may have been caused by unsuitable tenants. Of course, this is a worst case scenario.

But wouldn’t it be better to have confidence in the property management skills of trained professionals, people who have been in the industry for many years? With Wholistic Financial Solutions, you can safely leave all of those problems to us.
Here are just a few of the benefits you’ll enjoy with our OzInvest Properties property management:

  • You’ll have a sourcing and managing service that will find you the right tenant – easily and quickly.
  • We can guarantee your rent for 10 years – if we can’t find a tenant, we’ll pay your rent for you!*
  • You’ll get your rent paid on time, every time, for 10 years, guaranteed**.
    (*only applies to properties purchased through our affiliate OzInvest)

So why struggle with the worries of managing your investment property yourself? It’s so easy to hand it over to people like OzInvest who know and understand the business, leaving you to enjoy the freedom that investment confidence can give you.

6) We Can Provide The Right Coaching Needed To Keep Your Goals On Track

You may have some very clear goals that you have set yourself. And most of the time you might be confident of achieving them. But sometimes obstacles can appear, holding you back, blocking the path and causing enormous frustration. When you’re in the middle of a situation, it can be hard to see the way out; it’s hard to ‘see the wood for the trees’.

You’ll need advice. Sound, expert advice. Perhaps you may need to stop your spending; perhaps you need to aim a little higher. You may need to take more risks or perhaps you need to be a little more conservative. It’s good to have advice but how do you implement it? What should your approach be to enable you to achieve these goals? Where do you start?

Right here. This is where we can help you with the right coaching and mentoring.
We take a ‘Wholistic’ approach to reaching those goals you have set yourself. We can offer you:

  • Life coaching
  • Goal analysis
  • Money psychology analysis
  • Identification of the obstacles holding you back
  • Solutions to those problems
  • Help to design a bridge that will take you over those obstacles
  • Motivation to achieve your goals
  • Hold you accountable to achieving your goals

So don’t allow obstacles to block the way to your achieving what you desire. Let Wholistic Financial Solutions help you to identify them and overcome them. With our assistance, you’ll find reaching your goals a whole lot easier!

7) We Can Provide Your With Right Information About Property & Investment

You may be like many property investors who find that once they have purchased property, they are on their own. Family and friends don’t always have an understanding and may not share your property investment dreams. They might even think you’re crazy and exclaim ‘you’re doing what???’

Now that you have invested in property; you need ongoing support to keep you informed, motivated and encouraged. You’ll never feel alone with Investor Property and Finance because we’ll make sure you’re brought up-to-date with all the latest information with:
  • FREE monthly educational webinars.
  • FREE regular property investment educational seminars
  • FREE monthly newsletter with updates on tax information, loan product specials, investment opportunities and motivational issues.
  • FREE invitations to affiliated property investment and motivational seminars.
You can invest in confidence, knowing that we’ll support you all the way, from start to finish. With our varied professionals, we have the right person on hand at all times to suit your need, whatever it is. You’ll have all the strategies, advice, management, coaching and information you’ll ever need to make your property investment a success!

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