OzEMedicine - Wiki for Australian Emergency Medicine Doctors

see also:

• superannuation
• buying investment property in Victoria

• the following applies to superannuation for salaried employees in Australia but you should verify the details and discuss them with your financial planner or accountant before making any decisions as each person's circumstances and requirements differ, while the ATO tends to change the laws relating to superannuation more frequently than one would like.
• this website takes NO responsibility for any decisions you make, it is merely to provide you with a broad initial understanding to get you started.

• so you want to save for enough money to buy a place to retire in, and have enough superannuation at age 65yrs to draw down a reasonable annuity?

• you already have $300,000 in your superannuation fund at age 50 years PLUS $125,000 available in your own savings account
• you will continue to work until age 65 years with the current marginal tax rate of 45.5% and salary package voluntary concessional super contributions to maximum allowance of $50,000 pa from age 50 yrs (NB the May 2010 ruling is now that this cap only applies to super balances < $500,000 for July 2012 onwards)
• cpi = 3% pa
• interest on loans = 7% pa
• gross rental yield on property = 4% pa (actual will generally be less in inner urban areas or if property is vacated)
• annual costs of owning a property (land tax, rates, insurance, maintenance, etc) = 2% pa
• establishment fees for a SMSF including bare trust and mortgage establishment costs = $10,000
• SMSF ongoing fees $750 pa for annual audits indexed by cpi + 0.55% of portfolio for management fees
• establishment fees for a personal property mortgage = zero as you can add it to your existing home mortgage package
• house prices tend to double every 10 years (ie. annual compound growth averaging 6.8%), so a property worth $500,000 at current prices will cost you about $1.3m in 15 years plus stamp duty.

• you would be crazy not to ensure your voluntary concessional superannuation contributions were not maximised to the cap, which for those over age 50 yrs is currently set at $50,000 pa including 9% employer mandatory contributions
• these contributions will be taxed at 15% (30% if you earn over $300K) as they go into your super fund but that is a lot better than losing 45.5% in your marginal tax rate - this is a no brainer, so it is assumed you will do this for ALL scenarios here.

• if you put all your savings into a non-interest bearing savings account you would have $1,062,500
• if you placed all your savings including super into term deposits giving 5% pa, after tax, you would have $1,728,542!
• if you placed all your savings including super into share portfolios which managed to average 7.5% pa gross, after tax, you would have $2,227,000!
• furthermore, the 90% of this money is held within your superannuation fund which means you can draw down a tax free annuity on most of it while still having 10% of this in a personal account.

• seems like a good idea - everyone seems to be making money with it - but is it?
• let's assume we buy a $500,000 property with our $125,000 deposit and loan will then be $400,000 at 7% pa
• let's also assume we sell this property after 15 years so we can buy the property we really want, but to do so we spend 5% of the property value in pre-sale renovations (houses usually need to be renovated every 15-20 years to maintain value).
• capital gains tax on the sale will be at 22.5%
• assume all moneys in the super are invested at 5% pa in a term deposit
• the mortgage is interest only as we want to minimise impact on our normal cash flows - although we could save interest if we repay it earlier but this is a forced saving which would not allow equivalence with the other scenarios.

• this is a realistic growth rate for most residential properties over the long term (less for units)
• property will be sold for $1.3m giving after tax capital gain of $600,000 which will help address our accumulated interest losses which have resulted in a cash balance of negative $134,000 and pay off the initial $400,000 loan - yes, we have made a truly amazing after tax profit of $66,000 on our property investment over 15 years!
• luckily our super fund will have grown to $1.54m to give a net position of $1.6m BUT that is WORSE than Scenario 1!!

• this probably means we have managed to buy the property at below true market value or at the start of a long boom period - certainly not at an over-priced peak!
• 10% growth equates to the property being valued at just over 4x the initial price in 15 years
• property will be sold for $2.1m giving after tax capital gain of $1.15m which will help address our accumulated interest losses which have resulted in a cash balance of negative $90,000 and pay off the initial $400,000 loan - now, we have made an unlikely after tax profit of $660,000 on our property investment over 15 years!
• our super fund will have grown to $1.54m to give a net position of $2.2m.

• land itself will generally have a higher long term growth rate than houses or units as there is no depreciation on the buildings, furthermore, annual costs are less, and less headaches but not being able to negatively gear really hurts!
• 10% growth equates to the property being valued at just over 4x the initial price in 15 years
• property will be sold for $2.1m giving after tax capital gain of $1.2m (no pre-sale renovation) which will help address our accumulated interest losses which have resulted in a cash balance of negative $653,000 and pay off the initial $400,000 loan - now, we have made an unlikely after tax profit of $147,000 on our property investment over 15 years.
• our super fund will have grown to $1.54m to give a net position of $1.7m - no better than Scenario 1!
• moral of story, unless you really believe land is going to go up > 10% pa - don't buy it with personal money!

• seems like a good idea - everyone seems to be making money with it - but is it?
• let's assume we buy a $500,000 property with $125,000 deposit from super fund and loan will then be $400,000 at 7% pa
• let's also assume we sell this property after 15 years so we can buy the property we really want, but to do so we spend 5% of the property value in pre-sale renovations (houses usually need to be renovated every 15-20 years to maintain value).
• capital gains tax on the sale will be at 10%
• assume all moneys in the super and in personal accounts are invested at 5% pa in a term deposit
• the mortgage can be paid off within the super fund over 10 years as we want to minimise interest and this vehicle allows us to do this with impacting on our cash flows.

• this is a realistic growth rate for most residential properties over the long term (less for units)
• property will be sold for $1.3m giving after tax capital gain of $697,000 while the super fund also has $547,000 accumulated, while our personal savings account has accumulated to $260,000 and the original loan was fully repaid at 10 years.
• sounds great BUT this only gives a net position of $1.5m which is WORSE than Scenario 1!!

• this probably means we have managed to buy the property at below true market value or at the start of a long boom period - certainly not at an over-priced peak!
• 10% growth equates to the property being valued at just over 4x the initial price in 15 years
• property will be sold for $2.1m giving after tax capital gain of $1,336,000 while the super fund also has $602,000 accumulated, while our personal savings account has accumulated to $260,000 and the original loan was fully repaid at 10 years.
• now we are talking - this gives a net position of $2.2m - the same as Scenario 2 but gives the advantage of making our financial advisors rich as well!

• land itself will generally have a higher long term growth rate than houses or units as there is no depreciation on the buildings, furthermore, annual costs are less, and less headaches.
• 10% growth equates to the property being valued at just over 4x the initial price in 15 years
• property will be sold for $2.1m giving after tax capital gain of $1,430,000 while the super fund also has $92,000 accumulated, while our personal savings account has accumulated to $260,000 and the original loan was fully repaid at 10 years.
• not so good - this gives a net position of $1.86m - better than Scenario 1 and gives the advantage of making our financial advisors rich as well!
• moral of story, if you are going to buy land, ensure it will go up by 10% pa and buy it with a SMSF.

• you can't use the real estate property for personal or family member use unless sold out of the SMSF
• to ensure a break even result after 15 years:
  • average annual capital growth + average rent yield (eg. 4%) must exceed sum of average interest rate + average annual costs (eg. 2.1% pa) + 2 %
    • your investment is VERY sensitive to interest rates and final capital growth - profitable outcome is NOT guaranteed!!
    • ie at 7% interest, 4% rent yield, 2% annual property costs, the average annual capital growth over 15 years must be at least 7.4% which equates to an approximately doubling of property prices every 10 years.
      • a capital growth of 11.6% in this scenario (equivalent to tripling of property price over 10 years) will reward you with a net return of $0.9m more than if you did Scenario 1.
• to ensure you don't need to add after-tax income to top up super fund:
  • you must be in a situation to ensure at least a break even result as above, AND,
  • the annual $50000 concessional super contributions plus rental yield must be sufficient to cover interest and costs, and at 7% interest, 25% deposit, it will cover:
    • with interest only loan:
      • land at zero rental yield to purchase price of $685,000
      • house at 2% rental yield to purchase price of $755,000
      • house at 4% rental yield to purchase price of $1,100,000 but the $275,000 deposit may be too much as ATO may not deem your SMSF is adequately diversified.
    • with property capital repayment rate over 25 years:
      • land at zero rental yield to purchase price of $600,000
      • house at 2% rental yield to purchase price of $640,000
      • house at 4% rental yield to purchase price of $850,000
    • with property capital repayment rate over 15 years:
      • land at zero rental yield to purchase price of $540,000
      • house at 2% rental yield to purchase price of $575,000
      • house at 4% rental yield to purchase price of $730,000
    • with property capital repayment rate over 10 years:
      • land at zero rental yield to purchase price of $495,000
      • house at 2% rental yield to purchase price of $515,000
      • house at 4% rental yield to purchase price of $620,000

• do your own analysis - yes, get your Excel spreadsheet out and put in all the variables and prove to yourself if it will be worth your while - don't take your financial advisor's or friend's advice on face value - they have their own motives, and at the end of the day, whether it is worth investing in property will depend mainly on achievable capital growth rates in relation to loan interest rates.
• the LEAST you should do is ensure you pay full cap amount of voluntary concessional super contributions each year through salary packaging and invest money in term deposits if you do not want the risk of shares.
• a SMSF will make your accountant richer and give you more headaches with its complexities, BUT it can give you more control, avoid impacts on your cash flow from an investment, and if you choose wisely and buy well, you might be able to make yourself the same as you would if you had been able to invest at 7.5% return in a share portfolio but with the “security” of bricks and mortar although you and your family will not be able to live in it unless it is sold out of the SMSF.
  • the maximum property price which could be serviced through a SMSF without using after-tax income is ~$850,000 on a 25 year loan which would mean you would have to sell it when you retire to avoid the negative cash flows in retirement.
  • the maximum property price which could be serviced through a SMSF without using after-tax income is ~$730,000 on a 15 year loan and thus would NOT need to be sold on retirement if it continued to provide at least a 4% rental yield.
• if you negatively gear property, there will be an impact of your cash flow, headaches associated with managing the property and tenants, and if you buy well, you might be able to beat the return of a share portfolio that returns 7.5% pa, but this option does have the significant advantage of forcing you to save more money and thus you could get even better returns.
• you have to decide if your life is so boring that you need to make it more complicated and stressful by investing in real estate to get a few extra dollars for your retirement.

• for comparison, let's say we bought shares in Commonwealth Bank in Jan 1992 at their then peak of $7.90 before they later fell back to $5.80 in October 1992.
  • Even after the stock market crash in 2008 resulting in its price falling from $62 to a low of $24 and now a recovery to $53, the annualised capital growth rate ($53-$7.90 over 18 years) equates to 13.5% pa and this does not include the dividend stream which is ~5% pa tax free.
  • Even if you sold at the last bottom because you got freaked out, your capital growth rate ($24-$7.90 over 18yrs) = 7.8% pa and you still had the annual imputated dividends which equates to ~13% pa return over 18 years!!
  • some more examples:
    • BHP $6.40 peak in Jan 1992 to crash low of $20 and now currently $40 albeit with minimal dividends
    • Woodside Petroleum $8 in Jan 1996 to crash low of $28 and current $43 plus dividends
  • certainly not all stocks do as well as Australian banks, and you do have to diversify as a small minority of blue chip stocks will crash and burn like Telstra ($8 in Jan 1999 falling to $3.40 currently but reasonable dividends at least), although you do have the option of quickly selling them if you really feel it is a downward spiral.
  • You still want your money in the headaches of bricks and mortar when all you need to get is a 7.5% pa long term return on shares to match a 10% pa long term growth in property?