The bigger picture of investing your super
Did you know that there are at least six superannuation accounts with a balance of more than $100 million each and that there are just under 2,000 accounts with $10 million or more?
Some very wealthy people have been using superannuation as a way to save very large amounts of tax as such an account pays only 10-15% tax when people are under 60 or 65 and no tax when they are older. This is one reason why from July 1st new pension accounts (which are tax free) can only start with a balance of $1.6 million.
For most people that is still a large amount of money, but for those who are wealthy, this looks like a serious limitation and has had already one major effect. Recently an article in the Australian Financial Review had the heading “Property market ‘flooded’ as DIY super investors panic about rule changes”.
Basically from July 1st 2017, holding a large commercial property in super for those who are over 60 or 65 becomes quite a bit more complicated, so a number of these investors have tried to sell before an anticipated flood of sales after the rules change in July.
The complications are actually quite bearable – instead of one account, each member of a self-managed super fund (SMSF) will have to hold two accounts and they will have to pay more to their accountant and auditor, but usually no more than that.
Currently investing in property through an SMSF is becoming very fashionable. It is complicated but the complications have been mastered by a lot of people and it allows those with a balance of, say, $175,000 in super to borrow another $400,000 or even more and buy a property inside super. In other words, we are now able to borrow even more money to invest in property than before. Many would see this as a big benefit but there are some disadvantages.
Three disadvantages that come quickly to mind are firstly the extra costs and time of running an SMSF as members can have onerous responsibilities, secondly that the government keeps changing the rules and you can get very worried like the vendors described above or, as superannuation rules are very rigid, one can fall foul of these rules, especially as we get older. The third point to consider is that super is a low tax environment, which means that tax deductions from interest and depreciation are much lower, making it more difficult to pay off the loan.
In other words, buying property through super is very popular right now but it pays to be cautious and informed about the bigger picture.