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?
Superannuation withdrawals 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.
Employees have the opportunity to make significant tax savings by salary sacrificing more into super up 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The disadvantage of salary sacrificing is the fact that money contributed to super can’t be withdrawn until you reach your preservation age and retire.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 are close to retirement age and have 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.
A Property Strategy:
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 at any time 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, as 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. Whist superannuation funds can borrow, the rules and restrictions make funding property purchase very difficult.
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 other property purchases.
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 borrowing for the asset acquisition. Property investing has some generous taxation concessions that allow taxpayers to claim losses on 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. Contact Oculus to find out which strategy will achieve the best result for your wealth creation strategy.