Fingers crossed, negative gearing and super will escape the clutches of this budget. Both have great tax breaks but you might be surprised which is best.
I’m afraid you’ll have to forget the over-hyped annual tax breaks on an investment property. These are at best middling and only there because you’ve had to spend money. As we speak they’re probably illusionary too, thanks to very low interest rates.
The average gross rental yield is about 4.5 per cent in Sydney and Melbourne, though lower after running expenses, and fixed rates are under 4 per cent, so making a loss has never been harder. Not impossible, mind you.
Although this won’t always be the case, at least super’s tax benefits don’t waver. Hang on, did I say that? I meant while the rules will inevitably change in some future budget, they’ll be grandfathered as always. Only new money going in will get caught, not what’s already there.
Something gearing can’t do is self-generate. Super can, as income is re-invested because, not to put too fine a point on it, you have no say.
But all this is quibbling. The tax jackpot is on the capital gains. And here’s the odd thing. While property is all about capital gains, super is the quiet achiever if you can wait long enough, which is to say your entire working life.
The discount on capital gains tax when you sell is 50 per cent on a property, or any other investment come to that, so long as you had it for at least a year.
Wow, a tax that is both deferred and discounted? I’ll take one of those please.
In a super fund it’s a less generous one-third off but remember it’s only been paying 15 per cent tax on the income.
But that’s nothing, which is exactly what the capital gains tax will be in super after you retire.
So unless you’re in the two bottom brackets for tax – zero or 19 per cent plus Medicare levy where there’s little or no extra gain – super has it all over negative gearing.
Plus it comes with the bonus of automatic diversification. That’s all very well but tax breaks aside, surely gearing beats staid old super?
Yes, it will get you there faster since more money is invested from the word go, though borrowing bulks up losses as much as gains. The trouble is when you’re taking on debt timing becomes critical.
Property prices are at record highs in most places so you’re buying at the top of the market.
Don’t quote me but I suspect after a reasonable time the annual pre-tax return from a balanced fund in super and a geared property are similar after a while. Remember I’m talking about salary sacrificing a dollar into super, or paying interest on an investment loan from your pay packet.
Super gets the better breaks but is weighed down by having less to start with because there’s an annual limit on salary sacrificing of $30,000 ($35,000 for 50s and over). It will also have some money in cash and bonds which will never shoot the lights out.
So property will be off the blocks faster but is handicapped by a higher tax rate and deadweight costs such as repairs, council rates and maybe land tax.
The closer you are to retiring the better – and safer – super looks since its singular shortcoming of hogging your hard-earned no longer matters as much.
Hmm, instead of getting into more debt with gearing what about paying off the mortgage you already have faster? How does that stack up against super?
On a typical variable mortgage every extra bit you pay off is saving you about 5.5 per cent. Since this isn’t taxed it’s the same as getting between 8.25 and 10.75 per cent on an investment depending on your marginal rate.
Did I mention that along with a bank deposit and a government bond, it’s the only guaranteed return you’ll ever have?
Anyway I consulted my authority on these things, HLB Mann Judd’s head of wealth management, Michael Hutton, who says “the super fund doesn’t need to make the same as the mortgage because more dollars are going in. You’re paying 15 per cent tax instead of, say 34 per cent.”
So mathematically, salary sacrificing is better while rates are this low.
But there’s more to it than arithmetic, and this from a bean counter too.
“When you’re young, salary sacrificing locks your money away. It’s better to pay off the mortgage. Our rule of thumb is wait until you have 50 per cent equity in your home then think about extra wealth accumulation.”