The pros and cons of holding assets as superannuation
LAST year saw a rush by investors to start a self-managed super fund and gear into residential property.
Unfortunately, much of the activity has been created by a combination of fee chasing accountants, and property spruikers who are taking kickbacks that can be as much as $50,000 a property.
One of the main benefits of buying assets within super is asset protection. Provided you have not made an unusually high contribution to avoid creditors, the trustee in bankruptcy cannot touch your super.
The next advantage is tax minimisation. Because tax within a super fund is 15%, and capital gains tax 10%, there will be better net returns from a positively geared property if it is held within super. Once the fund enters the pension phase all income and capital gains are tax free.
But there are disadvantages.
First is the bother involved. To gear through a self managed fund you first have to set up a bare trust, and that trust can only be involved in a single property. So, if you were considering eventually borrowing for say, three properties, you would need to establish three separate bare trusts.
Even though there are tax benefits when the property is positively geared, it works the other way when the property is negatively geared. A rental shortfall of $10,000 within a super fund would save just $1500 tax - in the name of a high income taxpayer the tax saving would be $4650.
A fundamental rule of tax planning is that you take your tax breaks sooner rather than later. I would rather have a tax deduction today at 46.5% than accept just 15% in the hope I can get a tax break in 20 years.
When you are thinking about investing you face three fundamental decisions - the asset to buy, whether to borrow, and whose name the asset should be held in.
The factors that influence these decisions are something to be discussed with your adviser and your accountant. My own view is that property should be held outside superannuation where it can be leveraged to the maximum, ideally in combination with a home equity loan - the super fund should hold only interest-bearing investments and shares. This keeps everything simple, maximises the tax benefits today, and gives a diversified portfolio.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org.
Want to play with the data?
As always we're keen to see what you can do with the data, whether it be checking our work or making your own visualisation. Here's the data we used.
The original data set (Sheet 9): 2012 Superannuation Fund Level Profiles and Performance
My cleaned data set (for use in Tableau Public): APRA Superannuation 2012 Cleaned Data