Property as Self Managed Super

[Sunder]

Hi Guys,

I was wondering if anyone had done this before?

With above average income earners being slugged by Mr Rudd and Swan this time around (no surprises since Labour has always been advocates of the below average income earners), I've decided that legal tax minimisation is going to be a key part of my strategy.

From previous threads, most of you know that I think 2009-2010 is the right time to buy property, not 2008. So, I was thinking of this strategy:

I'm going to put some pretty personal details on here. I know to many people this will seem like boasting, but I know what I earn is pocket change to the majority of people here, so please don't think I'm boasting, and please don't laugh at my income either...

Okay, my base salary including super is $130k a year... In addition, so far this year, I have earned about $10k on share trading. So extrapolate that out to year end if I can keep up that performance, my total annual income should be about $150k. Paying full tax on that is ridiculous.

I'd like to salary sacrafice the full $50k pre-tax income to Super until about 2009. I understand this is taxed at 15%, so it should raise my super balance to about 100k by this time next year, which I think will be the prime time to buy. I think the bottom will have come and gone, but people will still be cautious.

I then intend on setting up a self managed super fund, with one or more cheap properties, and use this to minimise the tax I pay.

I understand the constraint is that I can't live in my parent's house forever, and eventually I will want a PPOR (since you can't live in a self managed super fund property). So my strategy is to then revert my super payments back to the normal 9% or the absolute minimum to service the loan, then leverage to the hilt for an investment property, and neg gear this to keep tax down.

When I am ready to move out of home, I will either change my normal investment property into my PPOR, and pro-rata the CGT if I ever want to sell it, or sell it, wear the CGT and buy my desired house.

My request of you... Can anyone review this critically, and pick holes in the strategy?

Thanks heaps!

 

[alexlee]

Didn't they change the salary sacrifice rules this time?

The main issue I would have with this strategy is your age, Sunder. You're 30, right? You can't access super tax free until you're at least 60, I think? That means you'll have to lock your money away for 30 years.

In my own case (and I'm 31), I'm minimising my super contributions as much as I can, because I just don't see the point of locking my money away for 30 years when I'll be financially independent way before then.

At age 30, decreasing tax by increasing super contributions isn't such a good idea. What I did was buy IPs outside of super.

Also, you might want to rethink that 'I'll sell my IP and buy my dream home' idea. That's really a step back. Why not buy multiple IPs, then buy your PPOR without selling anything? Sure you have a lot of non-deductible debt, but that's balanced by the gains on the IPs.

For a single person earning what you are, and still living at home, you should be able to save enough for a cheapish IP every year or so.
Alex

 

[kum yin lau]

Hi, would you like to run some numbers?

Place 50000 in fixed deposit for 12 months @ 8.5%

Maintain the Investment loan @ 8.77% interest tax deductible

$50000 x 8.5% off the higher tax bracket of 40%. Assume tax of 15% [Those aged 55 can contribute 100000 & get a 15% rebate from a pension payment]

Is there enough arbitrage there to make it worthwhile?

I worked out that I make around $1400 p.a.

I can't believe my eyes & I'm still scratching my head.

Of course, my strategy is always to borrow 1st & then, consistently pay it off. Eg. the 100000 'borrowed' is earning FD rates & every month, I pay 2000 into the offset acct which will reduce the interest I pay on the loan.

I'm not sure it makes sense but if I don't buy houses, then I have to do something about the money.

Anyone with views on this, please comment.
KY

 

[Sunder]

Didn't they change the salary sacrifice rules this time?

The main issue I would have with this strategy is your age, Sunder. You're 30, right? You can't access super tax free until you're at least 60, I think? That means you'll have to lock your money away for 30 years.

Also, you might want to rethink that 'I'll sell my IP and buy my dream home' idea. That's really a step back. Why not buy multiple IPs, then buy your PPOR without selling anything? Sure you have a lot of non-deductible debt, but that's balanced by the gains on the IPs.
Alex

They're my main concerns as well. But right now, I am earning way more than I spend, and it annoys me that I'm paying so much tax, when I am currently one of the lowest class of government services users (Done with education, no kids, private health cover etc). The idea of retiring with a million dollar plus Super fund appeals to me too, esp when 1/3rd of it was funded through tax deductions, and not my direct sacrafice

The thing with the buying the dream home though, I think would be this:

1. Say I had 2 apartments. I made some good CGT on them, and have few deductions left, since I presumably would have held them a while.
2. I sell them, crystalise the profits, deduct my crystalised losses from my earlier business failures, and pay the rest of the CGT.
3. I buy my dream house unencumbered or near so.
4. I repurchase another investment property, and have full neg gearing again.

From a tax perspective, it makes a lot of sense to me. CGT is charged at half rate, and I have a crystalised loss to claim against anyway. I may not always be on a high income, but I expect to be always on a high enough income to make neg gearing worth while.

 

[tubs]

Gotta side with Alex on this one. Why lock your money away until you're 65? If you start now, even investing outside a SMSF you'll have heaps when you retire. I dont want to lock anything away until then, and I think the strategy of locking all that money away for 35 years just to avoid some tax might warrant another look.

LVRs are likely to be lower for buying in a SMSF, so you'll be able to buy less properties than if you did it personally. For every 1 property in your SMSF you could get 2 or 3 outside, and this gives you more leverage, redraw ability in the future etc. For your age, income and circumstances you've got a great opportunity to set yourself up really well, so make sure you dont miss the chance just to minimise some tax.

Not saying one way or another, but once its in super, its gone for a long time.

I pay only the minimum into my SMSF. I take the extra employer contributions as part of my wage.

 

[Sunder]

I think the strategy of locking all that money away for 35 years just to avoid some tax might warrant another look.

Not saying one way or another, but once its in super, its gone for a long time.

Hmm... Maybe my desire to "stick it to the man" is clouding my judgement. I definitely wouldn't do for a long time. Sooner or later, I do hope to be married and will need the money...

I don't mind locking away part of my money for 35 years to some degree. I am earning way more than I spend. The excess money I earn is earning me good money on the stock market, but does those returns - which I pay full 40% tax on (I speculate, I don't invest, hence no CGT discount), justify the opportunity to cut 25% off my tax, and earn income taxed at 15% - which I can't get a hold of until I'm 60ish.

 

[alexlee]

Hmm... Maybe my desire to "stick it to the man" is clouding my judgement. I definitely wouldn't do for a long time. Sooner or later, I do hope to be married and will need the money...

I don't mind locking away part of my money for 35 years to some degree. I am earning way more than I spend. The excess money I earn is earning me good money on the stock market, but does those returns - which I pay full 40% tax on (I speculate, I don't invest, hence no CGT discount), justify the opportunity to cut 25% off my tax, and earn income taxed at 15% - which I can't get a hold of until I'm 60ish.

Do you really want to work until you're in your 60's? If you do, go ahead and put the max into super. Don't change your mind, because you can't.
Alex

 

[alexlee]

1. Say I had 2 apartments. I made some good CGT on them, and have few deductions left, since I presumably would have held them a while.
2. I sell them, crystalise the profits, deduct my crystalised losses from my earlier business failures, and pay the rest of the CGT.
3. I buy my dream house unencumbered or near so.
4. I repurchase another investment property, and have full neg gearing again.

And you'd still be working. Can you see a time when, with 10, 20, 30 IPs, you might not HAVE to work at all?

The unencumbered 'dream house' is an albatross. You still need money for upkeep, you're so emotionally invested in it that you're not going to use the equity efficiently, so you're still going to have to work. My goal is not the dream house, but the LIFESTYLE. That includes not having to work. If 'paying tax to the man' makes you so angry, why would you be happy to 'work for the man' until you're 65?

Why stop at 2? Why not 5? 10? 20? If you have money, you can ALWAYS buy your dream house. But that will appreciate too, you say? Sure. Say your dream house is worth $1m now. What if you build up $2m in property? Assuming the same growth rates, your dream house will be more and more 'affordable' because your assets are growing even faster.
Alex

 

[LynnH]

Sunder

Not only are you locking your money in super for 30+ years ...... but who knows how much the legislation will change in that time. There is already talk of the country being unable to afford tax-free superannuation in coming years, and that inevitably there will have to be some tax on super payouts, whatever your age. All speculation at this stage, but you just don't know what future governments are likely to do.

Hubby and I are closer to the retirement end of the spectrum, and we have seen huge changes in super over the years - including the Hawke/Keating government ripping ALL the money (which, by the way, consisted of member contributions ONLY) out of the Defence Force super scheme in the 1980s, in return for a 'guarantee' to fund military pensions from consolidated revenue (and don't get me started on that one!). So don't think it can't happen - ANYTHING is possible.

Cheers
LynnH

 

[alexlee]

If all that 'Australia is aging' and people are living longer trend keeps going, you can bet some elderly people will run out of money. That may prompt the govt to increase the minimum age limit on tax free withdrawals from super.
Alex

 

[Sunder]

And you'd still be working. Can you see a time when, with 10, 20, 30 IPs, you might not HAVE to work at all?

My goal is not the dream house, but the LIFESTYLE. That includes not having to work. If 'paying tax to the man' makes you so angry, why would you be happy to 'work for the man' until you're 65?

Wait... I'm not sure if you've completely understood my plan, or else I've explained it poorly.

1. I'm only putting 50k pre-tax into super. That leaves me 100k less tax to invest into "non-super" property and shares.

2. The 50k won't be every year for the next 35 years. It'll be until I think it's worth risking leveraging to the hilt. For me to get the same tax benefits from neg gearing as putting away 50k into super, I'd need to borrow over $1 million. If you haven't noticed, there's a credit crunch happening out there. Sure liquidity has improved and spreads have narrowed, (according to my credit analyst friends working for GE Credit and WBC) but chances of borrowing a million and the risk that entails in this market? Not worth it.

When the market returns to "normal", I'll be putting in the mandatory 9%, and probably leveraging to the hilt (700-800k) outside of super... I'm talking a strategy to hold off tax for 2 years, and still be able to buy into property.

 

[alexlee]

Any money you put into super will be locked in for 35 years. Or more. Is it worth it saving taxes if it's locked away for 35 years? If you're diligent with your saving and investments, you won't need 35 years to get rich. You'll just have $100k+ sitting in your super fund, and by the time you can access it, you won't need it.

I borrowed more than $1m when I was on a lower income than you're on now. Up to you.
Alex

 

[Pushka]

Are you employed? In which case the total $$ of money that can be put into Super is $50,000 which includes salary sacrifice and the employer 9% contribution.

Also, salary sacrifice into Super has not been stopped at all, the only issue with this is that the amount of SS is now put into the income for Centerlink benefits, if you are able to claim them.

I agree with the rest; try to get over giving the tax man your money; you are really young to tie up such money into super and the rules will change before you can access it.