Location – Location – Location
Is it possible for property in Australia to double in value over a 10 year period? Yes it is! And this is how…………………
Many Mums and Dads use property as a means of providing for their retirement. Why is that …… because they feel it is less volatile, risky and real to touch unlike, for example, investing in shares.
So………….how do you make investing in property work for you as a part of your retirement and tax planning?
Two couples, Jim and Elaine Grey and then Ralph and Kym White. There have more or less the same particulars – they are all 52 years old, all work at the same place, all do the same job and have similar incomes of $85,000 per year each.
In 2016 each couple buys an apartment for investment to help fund their retirement. The apartments are identical and have a cost of $300,000. Each couple pays a deposit of $100,000.
Initially, both apartments are subject to the circumstance that the rent received does not match the expense incurred, leaving a shortfall which must be made up by each couple. There is however, one difference which exists between the two couples – the Grey’s have bought their apartment in their individual names whereas the White’s have established their own Self Managed Super Fund (‘SMSF’) and bought their apartment through the SMSF.
The Grey’s Apartment – bought in their own names
- they used their own cash on hand to pay the deposit – $100,000.
- as the expenses exceed the income the Grey’s get a tax refund of 39% of the shortfall through negative gearing.
- the Grey’s have to cover the shortfall from their after-tax position, leaving them with less disposable income.
- assume that after 5 years the rent now exceeds expenses – the Grey’s apartment has become ‘positively geared’ and they will pay tax on this extra income at 39 cents in the $.
- assume then that after 8 years the Grey’s sell the apartment for $570,000. Half of the gain they have made, that is $135,000, will be tax-free and the other $135,000 will be subject to tax at the rate of 39 cents in the $. That is a staggering $52,650.
The White’s Apartment – bought using their own SMSF
- they used cash within their SMSF, obtained from rollovers of where their super was previously held to pay the deposit – that is $100,000.
- while expenses exceed the income, the SMSF will get paid a tax refund of 15% of the shortfall [negative gearing].
- the shortfall is covered by the SMSF using Employer contributions (SGC payments). No cash comes directly from the White’s and there is no change to their disposable income.
- assume that after 5 years the rent now exceeds expenses and the apartment is now ‘positively geared’. The SMSF will pay tax on this extra income at 15 cents in the $.
- assume that after 8 years the SMSF sells the property for $570,000. One-third of the gain made by the SMSF, that is $90,000, will be tax-free and the other $180,000 will be subject to tax at the funds rate of 15 cents in the $. That is $27,000.
So work out the difference!
Now let’s consider another outcome……..
Retirement approaches and again let’s assume that the two couples all retire from work and start to take pensions from their super funds.
After 3 months of being retired, boredom sets in and each of the couples return to work. Their part time jobs result in each earning $38,000 for the rest of the year.
- The apartment is still positively geared for the Grey’s. On this extra rental income the Grey’s will be taxed at 34.5 cents in the $.
- Assume now that the Grey’s sell the apartment for $600,000. Half of the gain that they have made – that is .$150,000 – will be subject to tax at the rate of 34.5 cents in the $. That is the Grey’s will have to pay tax of $51,750.
- The apartment is still positively geared for the White’s. On this extra rental the fund will be taxed $Nil as the SMSF is now 100% in pension phase. Income from the SMSF can now be paid to the White’s tax-free.
- Assume now that the White’s sell the apartment for $600,000. The total gain to the SMSF – $300,000 – will be tax-free. No tax will be payable. The capital gain from the SMSF can now be paid to the White’s tax-free.
By owning the apartment using their own SMSF over the years the White’s have had considerable tax savings when compared to the Grey’s.
Which Apartment would you prefer to own?
To find out more contact Campbell McCart on 07 3891 9669.
Campbell McCart is the principal and founder of B.I.T. Accountants of 43 Juliette Street, Annerley, Brisbane. Campbell operates a well-rounded accounting practice with particular emphasis on the use of tax effective measures to minimise taxation, including Self Managed Superannuation Funds as well as being the auditor of a substantial number of Self Managed Superannuation Funds.