The main target area of the government in this budget was to decrease the concessional tax treatment surrounding superannuation. The major changes that have been proposed can be summarised as:
•Lowering of the superannuation concessional contributions cap to a ﬂat $25,000 per annum down from $30,000 for individuals under 50 years of age, and $35,000 for individuals aged 50 years of age and over
•A lifetime limit of $500,000 for non-concessional contributions
•Introducing a $1.6m cap on the amount of superannuation that can be transferred into a tax-free retirement phase. This will effectively limit the amount an individual can earn tax-free income within their superannuation fund. Any amounts over $1.6m will be placed in a separate account and taxed at the superannuation tax rate of 15%
When looking at how these proposed changes to superannuation will affect property investors, we need to examine two distinct forms of property investment.
The first is individual property investment. Some are speculating that workers, especially those closer to retirement age who are looking to get the maximum amounts into superannuation, will have excess cash to invest.
“Property investors who are looking to build portfolios through their self-managed super funds will be the major group aff ected by the proposed budget changes to superannuation”
These individuals will be looking for other ways to reduce their tax liability, by diverting more funds into negatively geared property.
The obvious follow-on is that this will mean an increase in property investment, leading to an increase in property prices, in turn making it harder for young people to buy their first homes.
I don’t necessarily subscribe to this theory, although I agree there will be people who divert their additional cash flow into the property market. My view is that, besides the top 4% of individual wage earners who the government keeps referring to, the main people affected by these changes will be people planning for retirement.
That being the case, I would see most people in this category using their excess funds to pay down debt and invest in more liquid assets such as shares, managed funds and term deposits, or invest in lifestyle assets. If that turns out to be the case, I can see no real change to the landscape for individual property investors as a result of the proposed budget changes.
The second form of investment relates to those property investors who are looking to build a property portfolios through their SMSFs. They will be the major group affected by the proposed budget changes to superannuation.
With the reduction in contribution limits, investors need to be vigilant in ensuring they have sufficient cash flow to keep up with any loan repayments and property expenses that the fund may have.
As an example, if a husband and wife both over 50 years of age have multiple properties within their SMSF, with loans on each property, they are effectively going to have a drop of $20,000 per year in contributions coming into the fund. This might result in a shortfall of cash to make loan repayments, especially if one of the properties is not tenanted for a period of time.
In the past there would have been an option for the couple to increase their non-concessional contributions to cover this shortfall. With the introduction of the lifetime cap of $500,000 (which will retrospectively apply from 1 July 2007), this couple may find they are not in a position to make these non-concessional contributions – which leaves them in danger of defaulting on their loans and maybe losing one of the properties.
With these proposed changes to superannuation pencilled in to commence on 1 July 2017, it is imperative that any investors with multiple SMSF properties speak to their accountant or financial advisor to ensure these changes are not going to cause a cash flow issue within the fund.
It is IT IS generally difficult to predict if and how the recently announced changes to SMSFs in the federal budget will affect property investors. At this stage, there is no draft legislation to work with, so any prediction of how the proposed changes might affect people’s behaviour would be by and large speculation at best.
For those who are drawing a pension from their SMSFs, the $1.6m pension cap proposal could potentially incentivise wealthy individuals to negatively gear assets in their SMSFs through a limited recourse borrowing arrangement (LRBA), including investment properties. However, given the equity required to purchase real property, this option may only be available to limited SMSFs that have the liquidity to fund the purchase. The inability to use borrowed funds to improve an investment property within a SMSF could be a potential impediment.
Having said that, there is always the option for an SMSF to pay out the excess superannuation benefits as a lump sum, and for the member to negatively gear an investment property outside the superannuation environment. However, given how difficult it is to put money into the concessional tax environment of superannuation, it is likely that this will also present a predicament for those people who have the means to implement this option.
On the other hand, putting aside the complexity and costs of implementing an LRBA, it may be difficult for others who have smaller superannuation benefit balances, and rely on the income stream from their SMSFs to fund their living expenses, to negatively gear property inside or outside their SMSFs.
Due to these issues, it is difficult to say if the proposed budget changes would affect the behaviour of property investors who have their own SMSFs.
For people who are still accumulating their wealth in their SMSFs, the potential combined effect of the $25,000 concessional contribution cap and the retrospective $500,000 lifetime limit on non-concessional contributions would mean that the amount of benefit they could accumulate in their SMSFs would be significantly limited – in which case, there would be less resources available in their SMSFs for them to acquire investment properties.
“People in this life stage have become sceptical and distrustful of superannuation as a retirement vehicle due to the incessant changes made to the superannuation rules over the past few decades”
Perhaps more relevantly, people in this life stage have become sceptical and distrustful of superannuation as a retirement vehicle due to the incessant changes made to the superannuation rules over the past few decades. It would seem that confidence in the superannuation system is at an all-time low for the pre-retirement cohort.
To that end, these people may still acquire investment properties outside of their SMSFs as part of their overall wealth creation and accumulation strategies, but this is unlikely to necessarily increase the volume of property investment on the market. After all, real property is only one of the asset classes in which people can invest. If negative gearing is removed or limited in scope, we may potentially even see a decrease in property investment as the cost of investment is likely to increase for negatively geared investors.
All in all, the devil is in the detail, and until the new rules are enshrined in draft legislation, it will be very difficult to predict how the cookie will crumble at this stage.
The proposed changes to superannuation funds in the recent budget have focused mainly on the wealthy no longer being able to transfer millions of tax-free dollars into their retirement accounts. The lifetime limits for non-concessional contributions to superannuation have significantly decreased as well.
These changes mean that, potentially, many people will have already made non-concessional contributions in excess of the $500,000 lifetime limit from 2007. This means they will not be able to contribute any further non-concessional contributions into their superannuation funds.
Prior to the recent announcements in the budget, many relied on making further contributions into their superannuation funds in order to invest in property with these superannuation funds. In contrast, previously the only contribution limit by way of non-concessional contributions into superannuation funds was $180,000 per annum.
Over a 20-year period, this amount aggregates to $3.6m; going forward, it is now capped at only $500,000 over a member’s lifetime. This is a significant difference and does not even take into account inflation and compounding returns on investment.
What does this potentially mean for investors who wish to invest in property with their superannuation funds?
This depends on whether the property investor is already wealthy, with a sizeable property investment portfolio in a superannuation fund. It also matters whether the property investor does or does not have sufficient funds in a superannuation fund and wishes to invest in property within super.
Generally, there are fears that it is the wealthy who will mainly be affected by the new superannuation rules because there will now be a limit to how much money they can contribute, especially tax-free, into their superannuation funds. For these investors there will be no advantage in shifting cash into superannuation.
Therefore, wealthier investors will most likely consider other vehicles and structures for investing in property, especially with negative gearing in their own names as opposed to investing in
property with their superannuation funds.
“Wealthier investors will most likely consider other vehicles and structures for investing in property, especially with negative gearing in their own names, as opposed to investing in property with their superannuation fund”
That said, those with relatively low balances in their superannuation funds will also be affected by the proposed new changes to the superannuation laws because now they may not be able to make any further (or not enough) non-concessional contributions. This also means their superannuation funds will be limited in terms of what they can and cannot invest in, which is another potential drawback of the proposed changes to superannuation laws.
Finally, a minor reduction has been made to the concessional contributions cap for all ages, which is now limited to a maximum of $25,000 per annum. This change may potentially affect investors who have already invested in property with their superannuation funds, and who have been relying on salary sacrificing up to their respective concessional contributions caps to cash-flow fund their investment loans in their superannuation funds.
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