The Money Puzzle, with James KirbyHolding residential property inside your super fund has always been demanding - but also lucrative.
Higher rates, higher deposits, and a shortage of lenders have always restricted this activity to the most determined investors: Now, the new super tax adds another layer of challenges for property investors.
Stuart Wemyss of the Prosolution Private Clients group joins Associate Editor - Wealth, James Kirby in this episode.
In today's show, we cover
* Property investment inside super...all too hard?
* The threat to borrowing inside super from the Greens
* How to negotiate a lower mortgage rate with your bank
* Should sharemarket listed property funds be classified as shares or property?
Hello and welcome to The Australian's Money Puzzle podcast. I'm James Kirby. Welcome aboard everybody. You would think now with property expected to rise over the next two years, I saw a report from Bank of Queensland economists Moncton during the week saying, you know, he expects ten to fifteen percent gains in the next two years, that it would be an ideal time to consider property investment, which I think it may be. But the issue I think on the table for everybody just now is the structure in which you own property. And many people have put in this fifty billion at least worth of property inside Super and I wonder this week, with what's going on, whether those people have made a mistake. My guest today is Stuart Weems of the pro Solution Private Client Group and the Investopperly podcast. We've been talking to each other about these changes. It's time that we did a podcast on it. Hawai is Stuart.
I'm really well, James, thanks for having me back.
You're welcome. Let's te x explain to people. First of all, like that property holding property inside Super, it's been great that you can put that on the table. There's two types of property you might hold inside Super, but they called business real property. That's if you had a business, their business premises can go in Super. That was always a terrific advantage which a lot of people liked. More recently, of course, with the long profitable history of residential property, people have been putting residential property into Super. I have done it now. The issue is, of course, that two things have happened right that make it less attracted than it used to be. The banks withdrew to some degree, and mid rates very expensive for people to have property inside Super. This is before we talk about the Super tax, folks. So what to explain to listen to everyone if you could about property and Super, the good, the bad, and the ugly if you.
Like, Yeah, sure, James. And one of the main attractions, or I guess why people are so attracted to investing in property inside Super is that if they get into pension phase, you know, in retirement, that they can go and sell that property and as long as they're below the transfer balance cap, which in a few weeks time will be two million dollars per person, they won't pay any capital gains tax. And everyone knows, you know, property compounds and great capital growth, and that's where most of my return is going to be. So if I buy a million dollar property today, in twenty years time, you know, hopefully at seven point two percent, they'll be worth four million dollars. I make a three million dollar gross capital gain and I pay no tax. That's super attractive, and I think James, that's the main attraction of people want to invest in property inside SUPER.
A lot of people I talk to younger people who are thinking of but also love the idea that they have money in SUPER, which in many ways they feel they can't exploit if you like, or access. Obviously they can't access it till they tirement could be thirty years away, forty years away. But they can use the money in their super as a deposit, which they may not have. Most people don't have a deposit for a property in cash around the house, in the spare bank accountant there, it is in SUPER. So that's the other I suppose is that the other attraction.
Yeah, And it's a very transparent way of investing your SUPER. I mean, you know, if you're putting industry fund, it's very difficult to kind of work out how it's invested. But if you've got a self marriage super funded and you go and buy an investment grade unit or something like that. You can drive past it, you know where it is, you can really monitor its performance, and it gives people, you know that bricks and mortar. Of course, property is half the volatility of the share market. That gives people a bit of comfort as well. But we should talk about the negatives well, because fossible.
Why isn't it a mainstream Why are I is ended up in advertised? Why are the banks not offering loans in this area.
It's a complex structure, and I don't think the banks. You know, typically that you're borrowing, the loan amounts are lower because you're borrowing so seventy percent, whereas someone investing property outside they typically borrow the full cost, so the loan amounts, the average loan size is the lower, and there's a lot of administration from the bank's perspectives. So I just think they view it as not a profitable part of the market, and they pulled out, you know, around this sort of just after the GFC, really a lot of them started exiting. I wouldn't be surprised if they come back into the market, though, particularly if there's a bit of a resurgence in terms of demand for borrowing because it's been it hasn't been that popular, I guess over the last few recent years.
But who's doing the lending.
Mostly mortgage managers, so they aren't eighty i's deposit institutions. And that's a bit of a red flag for people because a lot of these small mortgage managers offer offset accounts, just like we have outside of super But just be careful with that because they're not going to get the government guarantee because they're not a bank. So it's okay to borrow from these people, and most of them they're regulated, they're safe, but just don't put too much cash with them.
You're saying you can borrow from them because they're not guaranteed, so they're in trouble if they go wonder. But if you put money in, you're in trouble. Is that what y you?
A blinder? They'll sell their loan book, right, so you're not really at risk that that's not such a problem. It's really the cash side.
But I know you say the banks might come back into the business if property starters lift, as many people expect it will, but isn't there something of a sword hanging over the whole thing anyway about the allowance to be like, for want of a better word, that you can borrow to buy property and super that you can that, because isn't there isn't there a question mark that never goes away. But whether the government will just close down the ability to use your super fund to borrow for property, it could do.
But I don't think. I mean it changed in nine or was it? I said no, it was even before that was a Howard government thing, wasn't it. So it's been around for a long time. I don't think, you know, I don't think there's much evidence that it's really been misused. Of course, there's always going to be people on the fringe that overborrow and do something silly and lose money. But I think in the main, you look at the numbers that are published in terms of the assets that are associated with these borrowing arrangements and the debt the equity is substantial. You look at those numbers, you go, whow, it's been great for investors. So I don't think it's going to go away, James, unless it starts being misused.
About the Greens in Parliament. The Greens, who will have the balance of power in this past said, as part of their support for the new supertax, which we'll do it's soon that they want this band the ability of super funds to borrow. They wanted banned SMSs to borrow. So isn't that a threat?
Well, it could be, but what will happen to pre existing arrangements? So you used to be able to have a bit technical but it used to be able to lend money into your own super funds. You didn't have to have a borrow from a third party a bank, but they closed that down, you know, your ability to be able to do that many years ago. But the existing arrangements, if they're there, can remain in place. So I guess my feeling would be if they did ban it, it'd be as of today, we can't do that anymore. But anyone that has that pre existing arrangement, it's probably going to be quarantined or avoided from that, which I mean maybe then, you know, if people are contemplating it, maybe do it sooner rather than later if that's the case. But I don't think there's any reason to ban it.
Okay, So what we've said so far. If you're listening and you're thinking of going using your superfund that's self managed super fund, that would be of course to invest in property. As Stuarts explain, there's a couple of issues. Their rates are high. They are the highest you can find in the market for a variety of reasons, one of them being a lack of competition in the market because the big banks aren't in there. Also, then this whole issue of whether you're allowed to continue to use your superfund and have the super fund borrowed to buy property. It's been under question for a long time. There was a report a few years ago by David Murray which was very powerful that it should be banned. It didn't actually get happen, and interestingly, the AP has never said that they would, but the Greens are saying that they want it banned as part of their support for the new supertax. So this is what we know so far. But we also know, as you say, it's your people are very usefully profitably using super to invest in property, either business property what they call business real property, or residential property. Across the country. There's at least fifty billion out there in that category. The big question, folks, is whether now on top of these restraints that are there, the new supertax will really finish this off in terms of whether it's worth the effort. We're going to talk about that after the break. Hello and welcome back to the Australians Money Puzzled podcast. James Kerby here, but Stuart Wiims, regular contributor of course to the Wealth section in the Australian. Stuart, let's talk now, let's really examine whether property is still worth it in Super. And before we do, one thing we didn't mention in the first segment was I remember you saying on the a few weeks ago, and I'd like you to just run this through once more. I remember you saying, why would you have it in Super anyway? Because outside Super the negative gearing is so much better. Could you explain how that all works?
Yeah, I mean one of the attractions I said, I think most people who attracted is to avoid paying capital gains tax in retirement, which is a great saving. But there's always another side to the coin. With most things when we make a financial decision, and the downside to gearing inside Super is that the tax rate is much lower. It's a flat fifteen percent as we know, whereas outside of Super, you know, going to pay somewhere between thirty and forty seven percent. It just means that the negative gearing, the tax benefit associated with holding that property is much higher outside Super. And that is really valuable because obviously a saving today is worth a lot more to me than a potential saving in twenty years time when I'm going to retire. So when you model this out, James, and compare the lower level of gearing inside Super, you know you can only borrow, so for seventy eighty percent, you've got to put some cash in together with the highest higher interest rates. Interest rates are about one to one and a half percent higher inside Super compared to outside, and then lower negative gearing. It offsets the capital gains tax savings. It's about neutral when you balance it all out compared to you know, investing property outside Super versus inside Super. So I think people need to be really careful about, you know, if that carrot is dangled in front of their eyes, say, look, you're not going to pay any capital gains tax, that's great, But what am I forgoing in order to achieve that outcome?
It's like an opportunity cost. So you're saying, listen, yes you forget that property. If you had bought it as a present, you're paying forty seven percent tax. You've got no tax bricks. Your entire expenses come to two thousand dollars. If you had a property in there, you could add that could multiply by ten by twenty. Okay, So you're saying it's neutral. The perfect time to ask the question. It was. It was, it's noutral, it was beautifully balanced. And now here comes the new supertax. Okay, very briefly, folks, I'm sure you have got a grasp on it. But just to recap the new tax, which is du believe it or not, to effectively begin on July one, covering its first financial year to July one, twenty twenty six, when they start to collect on this tax, for people with amounts over three million and super, the tax will be imposed. It's a new tax. It's fifteen percent, and if you recall, there's already a tax of fifteen percent once it goes over once you have more than two million and super starting July one, under this new law, once you have over three million in super, there's an extra fifteen percent and it's based on realized gains. That means the paper value of the property that you had thought you were holding for twenty years inside your super account. You could get a bill to be paid by you each year on the paper notional theoretical gain of that property. And if the Greens have there ware, the threshold will drop from three millions two million. And if they don't indexit, which they don't plan to, many more people will be brought into the net every year. God feeling Stewart about let's assume that old's going to happen. Everything tells us it's going to happen. The government are in a very strong position. They don't have to really buckle for anything just now they've just been reelected. What do you think.
The other thing too, James, is that you pay fifteen percent tax on the unrealized gain. But then when you come to sell that asset, you were taxed on the original cost base of the assets, so you'll pay ten percent, So essentially you'll end up paying twenty five percent.
It can be clarify. That's if you sell it before you retire.
That's well, that's if you sell it before you tire. Correct or you're over the transfer balance cap, so you have more than two, which is probably going to be the case, of course, because the tax kicks in at three. So you're going to pay somewhere between fifteen and twenty five percent in capital gains tax as a result of these tax which is look and look are you're going to I saw something over the weekend that the average top ten self managed super funds on average told four hundred and twenty million dollars or something like that in them. So I don't think anyone sitting here going, well, they shouldn't pay twenty.
Five I mean, unfortunately, it's because of these people that the whole damn thing has been yet through and it's trying to get at this what we don't know but this tiny number of people with enormous amounts and super that are legally in there by the way, But of course no one can stand. No one's going to stand on a hill to defend them because it doesn't stack up. But here's the thing, it becomes the everyday tax situation for property and super So does it as it stand, really undermined the attractions of property and super Well.
I did some financial modeling using a scenario that I think is really realistic. So if you have a couple that they're in their mid thirties, have one hundred and sixty thousand dollars of super each, so three hundred and twenty all up, they go and buy a million dollar property, borrow seventy percent in a self managed superfund, it should work out okay for them. That is that their balance should be only the north of about three million dollars by the time that they get into their sixties, which will give them some flexibility to withdraw any excess amounts if they needed to. But the key assumption here is that the both spouses have equal superbalances, which means they own fifty percent of the self managed superfund throughout their entire working career. Unfortunately, that assumption is unlikely, very unlikely. Normally we see in where we have a couple, Normally one of those couples will have a lot more super than the other, either because they've got different incomes, of course, or because of matern leave, all these sorts of things. So for the average person in their thirties, they're thinking, hey, I've got a really long runway twenty years, I should just go on gear into property. They need to be really careful because I think in many situations they'll be caught by this three million dollar tax. And one of the downsides to gearing into property is illiquidity. You know, So if I have a big bill or a big tax bill that need to pay, how am I going to pay that without selling the asset? So I think people need to be very careful with this. And I think if you overlay what we spoke about in terms of you know, lower negative gearing, higher interest rates, lower overall gearing inside super this is just another element to I think make it look less attractive for the average average Australian.
Yes, and the couple you mentioned, what they'd have to do was contribute bayond equal each year as well to try and manage the two portfolios basically individual portfolios, to watch the caps which are looming.
Yep, that's right, because if one's contributing a lot more than the other, of course, then they're going to own they'll have a greater share in terms of member balance of that self managed super fund. So it's difficult. You could start off when you buy this asset thirty five you do have very equal incomes, but what happens in ten years time. When you don't, it's going to be too easy to fall foul of this cap, particularly since it's not indexed exactly.
So you could have a couple where they've been together for all their lives and one person contributed more so that person goes over the individual cap. The other person isn't anywhere remotely near that cap, but the couple at such their household get hit with the tax. That's, as you say, and one of the kind of planks that make property less attractive now and super on the basis that this tax comes through in the way that it is planned. Okay, yeah, difficult got time, difficult time for people. It's really a pity that this has been restrained in so many ways and is met so complicated and in many ways people may think they need to pay big fees to even understand what the rules are. But I think if you track it, folks, we are covering it very carefully, and if you do tune in to this podcast and some others we have done both on the tax and on property, I think you can make your own mind up. Which is a very good time to tell you that we are going to do especial on the new Supertax on Thursday this coming Thursday with Hugh Robertson. Okay, now I have some really good questions, very good questions that I want to let you know about some clarification, useful news about the solar and batteries program which everyone was so interested in a couple of weeks ago, with James Gerard's an update on that. Okay, back in a moment, Hello, Welcome back to The Australian's Money Puzzle podcast. James Kirby here with Stuart Whims of the pro Solution Private Clients Group and the Investoppaly podcast. You weren't involved in this, Stuart Williams, but James Gerard was, who's regularly on the show, and he's something of he's very interested. He's a financial advisor like you are. But I don't know if you're as interested in cars and batteries and all that sort of thing as James is. And we did a special on what's available to anybody basically under the new government scheme there's for renewables and encouraging incentives in this area. The incentives were on the home battery and on the electric cars. The electric cars is ovated lya see one hundred percent deductible the batteries. Basically, many people one in three households have a solar panel in Australia, thanks mostly to incentives in the past, but only three percent of them have battery. So the new scheme for the government is basically cuts the cost of a battery in half. It's a federal scheme and James basically round the numbers and in whatever state you're in, if you couple what the government is offering along with your local state offering, you'll get your battery cost cut in half. But we weren't really clear still when it started, so for what it's worth, the federal government solar battery scheme goes live on July one. I just thought i'd let you know about that that actually comes. I just come into me this morning from one of the industry players there. Okay, now question Liam. You want to read Liam's question? Yeah?
Sure, Liam writes, I love the show, wondering if you or your guests have any views on the approach for people who just bought a house. I'm in a position of being able to pay an extra eight hundred dollars per month into my mortgage offset, which is doable until I have kids. Given the high interest rates, I would have thought that's best to do. It doesn't make sense to split the extra.
Dollars, Okay, I never advice here Liam, of course, on the information. Does it make sense to less paying into the mortgage off set? What do you think?
I think what Liam say is maybe split it towards something else. I'm not really sure, but really the mortgage offset is really the best place to park any spare cash because if you think about it, for two reasons. Firstly, it's a risk free return. Like if you invest in the share market or put it somewhere else, you know you're going to take some risk you're not really certain what the return will be. But in a mortgage offset account, you're definitely going to save six percent to whatever your interest rate is. Secondly, it's not taxable, so you know, if you're paying an average tax rate of thirty percent, for example, to earn a six percent return after tax, you need to earn eight and a half percent, and you need to earn eight and a half percent on a risk free basis, it's just not going to happen. Why so, for anyone that has any spare cash and savings, it put parking in a mortgage off set is really the best way to go unless you're willing to, you know, take a very long term timerize and of course and say, look, I want to put that money into equities or property or whatever it might be.
Okay, terrific assuming that you have spare cash, and good for you, Liam you're thinking ahead. I remember the mortgage off set, so I remember thinking they sounds so good if I only had spare cash to put into them back in the day. Okay. Question from John J O N John So he says, I'm feeling tightly squeezed on my variable home nun with A and Z and as a fresh first home buyer, it's eating sixty two percent of my income. I met recently to ask for a better deal, and I was told no chance, no discussion. I stated that currently three of the big banks are offering a five point eight four percent variable rate, significantly lower than my one. So what the response was? A and Z wants to move customers and new clients onto apps. Okay, so John says, given the resistance of the banks to adopt work from home arrangements themselves due to them being considered impractical, isn't it a bit rich to force customers effectively to move to work from face to face interactions with the bank to virtual coaches bolstering their other worldly profits. By that, he means very big. I suppose. Yes. Okay, Look I'll take all that on board. John. I think Stuart, you've always said that that people should rock up to the banks. And I do not need to pick one bank here over another because it's one person in one bank. There's millions of these transactions. But you are firmly you told me, and I did this and it worked that if you go to a bank and you ask for a better offer, they will, but you must use certain magic words. What were the magic words again?
Yeah, that's right, you ring them up, and so what I if I was, John, I'll ring them up and say, I'm just about to sign my discharge authority because my movie.
That's the magic word.
Yes, is going to refinance me to ing you're putting IMNG because I typically have They've got a really low sort of ASIC variable rate. So I'm about to refinance to IOD. But I just wanted to check if you could give me a better rate. But here's the additional tip, James, that I didn't previously discuss with you. It's really strange that bank pricing so when they'll have a pricing tool and they'll work out whether they can match the rate and say yes or no, but they can change from week to week. So, given John's repayments about sixty two percent of his income, I'm going to take a guess to say he's probably trapped today and Z he probably can't refinance elsewhere because he's got too much dead or not enough income, etc. But the people that you call, which is the retention team, don't know that. They're not going to be wise enough to know that you can't refinance. So that's why I say to John, say, you know, I'm going to refinance to ID even if that's not possible. But if you're not successful today, ring back in two or three weeks time, because it might be a no today, but it could be a yes just in next week or the week after or whatever. So be persistent with it.
Depending on the team's targets inside the bank, then what's happening in the bigger, wider world. And of course that's not for an individual John, that's for all the John's in the world out there. It's a very general observation that stet is making. Okay, have a look at the final question from Jeff if.
You would, yes, Jeff, right, So, I'm interested in how portfolios are balanced by giving weight to property and infrastructure. My understanding is this asset class is supposed to bring a more conservative diversification into a portfolio. But is it actually the case when it's most commonly achieved by investing in funds comprising of listed property investment companies. If so, is it fair to say then that this asset class would be more categorized, more correctly categorized as equities, and as such would remain exposed to equity market fluctuations.
Yeah, it's a great question, Jeff, it really is. I mean, you would think if if we talk regularly on property, especially on the Tuesday show, why don't we talk about reads, why don't we talk about property funds? Well, this is the thing. Direct property is direct property. We started at the start of the show talking about why you might have a property. By that, I mean bricks and mortar number twenty two railway cuttings that you own in your fund, as opposed to a share or a holding in a variety of listed property shares, And if you look at the big super funds, industry funds and retail funds, their property is direct property. They own, you know, the office block down town. They don't own that. The value of that block in shares in a listed company. And if there is a crash or a serious market reversal, the fact that they are property in underpinned by real asseense does not make much of a difference. They fall just like everything else. So I think the JEF is I think basically what Jeff saying is correct that as an asset class, if it's listed, it's it's listed, So it's the listed security. So it's a share even if it's underpinned by property. What do you think maybe okay, yeah, yeah, okay, the other put up the other.
So let's decide if it should be defensive or in the growth part of the portfolio. So to be a rate a real estate investment trust, you need to earn seventy five percent of your income from rental income, or in Australia, eighty percent of assets on the balance sheet are from real property, and that must distribute ninety percent of that income each year. So really, what we're actually investing in is something that is very much property heavy in these sorts of investments, and now, of course they're traded every day. But the idea behind reads and infrastructure, property and infrastructure is that you will get most of your return in income. With a little bit of capital growth. Maybe the capital will keep up with inflation, but most of your return is income. And when you look at the index a Vanguard's Austraining Property Fund, eighty percent of your return over ten years has been income. So it's done what it should do. It's done what it says on the team.
You're buying a rent rule, You're buying a.
Rent role, and that's why it's more it's considered in more of a defensive asset rather than a growth asset. But if you have a look at the performance, the best indicator was when interest rates surprisingly. I say surprisingly because the RBA said they weren't going to move it, but surprisingly moved in twenty two and sort of spook the market. What you saw then is the Vanguard Index fund dropped about twenty three percent in that twenty two calendar year. You look at the unlisted funds, most of the values hadn't changed yet. Now the Vanguard Index Fund has actually recovered. It's almost back to where it was before interstrates dropped, whereas unlisted property trusts haven't yet recovered. They probably will over the next twelve months. They lag, they lag. So what the listed companies will tell you is what's going to happen to these the prices of these assets, even though it hasn't yet happened. But you still do get that look through exposure into that market, albeit more in a real time basis as opposed to if you had unlisted assets.
Okay, that's a really good answer. Yes, so yes, it does give you access to property. It is underpinned by property. They never actually knew that there was such strict sort of legal constraints around reads for property trust to call themselves such. And then as you make the point that so you're getting that exposure, it really is property exposure. The difference between the block in Martinplace that's in a listed fund and the block that's in an unlisted fund is that the listed fund, its share price will move faster and it will react faster instantly, probably to what's going on in the world, while the unlisted one will react eventually. So once a pointer to the other.
Yeah, and I think that price discovery from an investor is a really valuable thing, right because if I've got an unlisted asset, I'm really relying on the manager and the value and the auditor of that fund to make sure they're representing what's actually happening. But if I'm investing in something that's a listed asset, that price discovery that's happening each day when they're buying and selling chairs gives me a lot of comfort that it's really reflecting its current value.
Okay, very good, very interesting, Thank you very much, Stuart Wiims a pro Solution Private Line Group. Loveing to have you on the show. My pleasure, always good to have you on the show. Stewart, terrific. All right, now, folks, stand by for a Thursday's show where we will have a few Robertson who is on the Baron's top one to fifty financial advisors, but he is. We're going to do a special on the new Supertax. We have to the correspondence has just mushroomed. Is that the right world flourished on the back of this? So many questions people have asked, I think what I'm going to do? Actually, the whole show will just be your questions about it and in that way hopefully we will really get a clear understanding of what it's all about. Okay, keep the emails coming, the money puzzle at the Australian dot com dot au. Ok soon
