Hello and welcome to the Australians Money Puzzle podcast. I'm James Kirby, the Wealth elsher at the Australian and welcome aboard everybody. Something maybe perhaps of an improved tempo for property investors this last few weeks, just a few signals, you know, better clearance rates for a start, rentals again tightening up, which is bad news for everybody except people who are owners of rental property, which are of course investors. And those figures they do seem to be tightening up
again after a softness over Midsummer. Financing costs looking like they will improve going forward, so a lot of people are examining again, of course, the possibilities the structures in which they can own property and become property investors. Now there's a big debate out there all the time about whether you should use your super for owning a home or whatever. That's just sort of a general debate for everybody, and it assumes people are in big super but active investors.
I mean, if you are a serious active investor then in property then there comes a point where you're going to have to assess, at the very least sales managed super fund and should you have one. If you had one, how would you approach property? There's pros and cons and I want to cover that today. The ideal person to talk to about this as someone who's across both worlds. If you like super and property regular on the show, it's Stuart Weams a pro solution. Hi Stewart, how are you.
I'm really well, James. Thanks for having back on the show. Always enjoy being a guest.
Great to have you on the show. I was looking at some of the work you were doing around SMSFS and you mentioned just in case our listeners don't know and they should know. Just to spell it out, folks, if you have a self managed super fund, then you can do all sorts of things that you can't do if you have a convention of super fund. And one
of the more interesting parts definitely is property. Now you can have what they call direct property, which is the old fashion thing where if you own a business, for instance, your fund could own the office that you're in and then you can rent from your fund. Beautiful arrangement. I wish I had a business to do that. I don't. There was a time I could have done it. I should have. Then more commonly, you can two ways into property. Right, you can just buy a property. Now, you can just
buy one for your fund. You could perhaps if you have piles of one, you could just buy one and put it in the fund. More commonly, you would get a mortgage, and you get a special mortgage and you pay a lot more than everybody else for that. And there's another way which Stewart had reminded me of, and you can co invest. You can joint venture with your
own super fund and buy property. They're really intriguing, But then there's also a dangerous site here where not super promoters per se, but property promoters really push SMSF opportunities for property on the wrong people. Posture is that we want to kind of we want to put this down for us. We want to first we want to explore this, but we want to warn our listeners. First of all,
what's wrong with this sort of scene. Would you explain the perennial problem of smsf's been abused basically by the worst sort of property spooker.
Yeah, it's a pot of money there that property sprewkers hope to get access to to go and obviously sell property. And the big lure for people is potentially avoiding paying any capital gains tax. And we know that if we're going to invest in property and hold it for many years, hopefully ever many decades, that hopefully, if we make the right decision, we're going to crystallize a large capital gain.
And so this dangling of this carrot to say, well, if you're in a self manage superfund, then you convert into pension phase, and all the members in that super fund a pension phase and the transfer balance cap you go and sell that property. You're not going to pay any capital g That sounds like a tremendous idea and
I'm not totally against it. I think we just need to make a fully informed decision because there's always two sides to every coin, and so that's the benefit associated with borrowing to invest in a self managed superfund in property, but there are some negatives too, And so what I wanted to do is sit down and work out and prepare a financial analysis using an internal rate of return, which we spoke about back on the twelfth of November on this podcast.
You're so organized, Stewart, November, I barely remember November.
True, I barely remember the twelfth of Februar. If I'm going to be really honest, So if listeners need a refresh, they should go back and listen to that episode. So that's the positive is no capital gains tax potentially, But there are three negatives associated with investing in property inside
a self managed superfund. The first one is lower gearing rate, so we can typically borrow somewhere between seventeen eighty percent, which means we need to contribute some cash into the property, whereas if we invest outside we can, and we've got equity other property, we don't actually have to put a cent of our own cash in, and that helps the internal rate of return because I'm putting less money into this asset, hopefully still achieving the same return. The big one, though, James,
is much much lower negative gearing benefits. So as we know, Super pays at a flat rate of fifteen percent on all income, whereas the highest marginal tax rate outside super is forty seven percent, three times more than three times side super.
Just three times, so the negative gearing is three times more attractive. Put simply, if you buy a property outside, if you invest in property as a person as an individual, as opposed to using your self manage super fun, I just want to rewind the tap just before we go too deep into it. I just want to explain to listeners who are not familiar at all, if you like, with the whole thing. So the two it seems to me still that there's two types of people who use
an SMSF for property. There's the investor who is effectively Dey Factors sophisticated. By that, I mean that they have they started in an SMSF for all the right reasons. They want to be an active investor, They want to diversify, and they want to sort of exploit the opportunities that are there for self managed super funds for people who take the time and make the effort to use them.
That person perhaps then has a diversification. They have shares, and they have fixed interest, and they have alternative assets, and they have this if you can imagine a pie chart, folks, and you can imagine it's split up into various segments, and there's a segment missing, which is property. Right. So they then will say, I also want to have property in the mix, and they decide in a competent fashion how they choose their property. The property is included in
the super fund, and there's a long term plan. That's the ideal with the absolute wrong way is the person who never thought they'd have a self managed super fund in any event, who may not have enough money to run one in fashion that it's effective, that the fees
are okay. But they were approached by someone who said, there's a great opportunity here, and you could buy this apartment in this you know, delightful apartment complex, which is one of an endless number of complexes that are being built in this area where and they were never going to make any money, but somebody will say here's your chance. And the person will say I don't have I don't have that sort of money, and the promoter of the
property would say, oh you do. Actually, all you have to do is join the club, sort of join the elite. This is how they pitched this. They say, you know, you can hit the big time here. This is what wealthy people do. You start an SMSF and you buy this property. I've seen, I've saved, I'd like, I think some people from going down that avenue. So I just want to put that on the desk if you like.
First of all, foreveryone to think about this is a conversation between Stuart and I, and we we're making certain assumptions and we're going to explore the opportunities for the active investor to use a self managed super fund for property. But the ground rules here are that it's part of a diversified portfolio and that you know what you're doing with your fund rather than coming into the wrong door. There's no rules against it. Isn't not the problem really?
These little scandals every other day there's miserable little scandals we see all the time about people who are basically duped by property sprukerus which seems to be a uniquely Australian term by the way, sp or UI k e R s in the Macquarie dictionary. I don't know if it's in anything else, but we know what we're talking about, that sort of thing. So let's assume everyone's now clear on that and they understand what we're saying. So can
I ask you very of a question. If I have an SMSF and I'm thinking of putting property into it, is there a proportion of my fund that I should portion to property? Is there? Is it? Because thinking about property is you can't buy a bit, you can't buy ten grand worth of an apartment or fifty grands worth of us buy the property or not by the property. So how do you deal with that lumpy nature of the acid?
Yeah, I mean you hit the nail on the head, James. It's the difference between being sold a product and being given advice, and unfortunately a lot of people sort of confuse the two and we need to be really wary, which is kind of the reason why I did the work, because you know that saving capital gains tax sounds like a fantastic idea, and I would be dumb if I
didn't investigate something like that. But just to sort of summarize, the less the lower gearing much much lower negative gearing benefits, and the higher interest rates that you're paying inside super negate one hundred per the capital gains tax saving. So actually you are no better off.
They do they? You mean? On average? Yeah?
On average? Yeah? Just I mean when you look at the average how an average property sort of behaves, why.
Would you do it at all?
Why would you do it?
So you're a gett?
Are you exactly right? Not for everyone? You know, I think it would suit some people, and it sort of comes it's a roundabout way to sort of answer your question, James, I would say that I wouldn't want the equity in the property, So that's the amount of cash that I'm contributing to the property to really be more than fifty percent of the superfund.
Sure one property fifty percent of a fund is a high concentration, isn't it It is.
Yeah, it's a very high concentration, and I would want it to be much less than that if I'm close to retirement, of course, but I'm really talking about people that have a bit of a runway through to retirement. The problem is a lot of these spookers, as we like to call them, it's targeting younger people, which means that the it'll end up putting all their super in this particular property asset, or at least most of it.
And the argument might be, well, if you're in your thirties and you can't access super into your sixty you got three decades. Surely buying a property and holding it for three decades is going to work out well. And my answer would be yes, But you know why am
I doing inside a self managed super fund? Because if I'm thirty, I want to have the flexibility and control of that asset and maybe even utilize the equity in that property to leverage further or to upgrade my home, do lots of different things that might happen over the next thirty years, which I can't do if it's trapped inside Super. And then the other argument might be go, well, then you're got to pay capital gains tax, and my argument would be, yeah, but I'm going to get the
negative gearing benefits. I'll play a lower interest rate and I can have a higher rate of gearing outside Super, So I am against it. I guess in general terms.
The only flow theoretical flaw in your approach is my SMSF. If I thought you wouldn't have any property, we don't have property trust, but it wouldn't have any direct real bricks and mortars property. Isn't that a hole in the pocket if you like.
Well, I think most people would be well served by investing in both property and shares. And then so then it's just a question of ownership structure. And as a general rule, I like to have my clients hold property outside super, and if we're going to invest in shares, we tend to do that inside Super. And so I'm not saying don't go into property. I'm just saying I think a balanced approach to asset classes makes sense for most people. It's really just then about the ownership structure.
And again let's return to why this is so popular today. It's really driven by people trying to sell property to people that can The only way they can afford it is if they do is do it inside their self managed super fun So.
I think we take a break, but we will before we end conclude this discussion about smsfs and the opportunities and property. We will explore a hybrid if you like, which can suit some people and it means using your fund, but it also means being able to access the negative gearing. It's co investing. We'll come back to that in a moment. Very interesting. Hello, welcome back to the Australian's Money Puzzle podcast,
James Kirby with Stuart Weems. Now, folks, before we put the idea of property being held inside a self man of superfund to one side, there's a very interesting arrangement you can do. It's called co investing with your super fund. I did it myself early days. My accountant had no idea what I was trying to do when I did this, but he learned and it worked. So this is Stuart,
tell me if I get any of this wrong. Very simply, you have a self managed super fund and you Jack or Jill, you do a joint venture with that super fun fund to buy a property. You co own it inside a unit trust. Your super fund takes no risk on this basically, that is, it has no leverage. It simply puts in equity. Make it really simple. There's a five hundred thousand dollar apartment. The super fund puts in one hundred thousand, and you, the individual, puts in four hundred.
You own four fifths. The super fund owns one fifth. This is how it works. Then you pay all the bills and you do all the borrowing cost goes to you, so you get the negative gearing. Look, I think it's pretty good. The only flaw part from trying to explain to accountants that it's legal is that it's a job that it's always that someday someone's going to have to do a deal. In other words, either you have to buy it from the fund or the fund has to buy it from you. In my case, I actually I
bought out of the fund and then sold property. But explain if you were to listeners, what's this called. Is it common? Do you reckon commended? And as its best? How does it work?
It's not common, you know, it's a more complex arrangement. But I guess the thing that I was thinking about why it might suit kind of where we are in the interest rate cycle is that obviously, with credit tightening that's been happening since twenty seventeen and now with much higher interest rates relative to the previous decade, the capacity,
everyone's investment capacity is compressed. And so the problem with that, and that's why obviously we've seen locations like Adelaide and Perth do so well because relative value was much higher. I think that's evaporating a little bit now, but it
certainly was going back a couple of years ago. And so the concern then is that people go, Okay, I'm going to go invest in property, They go and speak to their mortgage broker, they realize they can't borrow as much as they thought, and then they end up sort of compromising either on location or type of property and so forth, and in the long run there's a cost
associated with that. So the way I was thinking about it was that if you were let's call it set rich income poorse so you had a lot of equity and property outside super but you didn't have the boring capacity that you desired or the cash flow that you desired to service that boring capacity. Well, this could be a good solution. And the main reason you would do it is you would implement this solution is so that
you could level up on quality. You know that if you didn't, if you didn't implement a co investing strategy, that you would have to compromise on quality. And of course we wouldn't want to do that, so we would implement it. And you're right, James, you know it's not forever.
You could say, well, I'm going to use some of my super and then five years down the track, when i you know, the kids are in school and my spouse is back at work or whatever it is, I'm going to buy that portion back off the super fund again.
And you get evaluation basically don't you just buy it at market value? And you say, well, one fifth of that apartment is still on by the fund, so I'm going to buy out the fund and then you transfer the money into the fund. It's all entirely legit, it's but I think it's good. I think it's a lot better. There's someone who wants to get into property who can't get a deposit, so hell of a lot than people who go off and start an SMSF just to do
a property. But it assumes it does assume the person already has an SMSF, doesn't the structure, and it assumes they understand how it all works.
Yeah, it does. But also the other thing I like about it, James, is not permanent, like you can say, Okay, well, I'm gonna I'm going to revert back to the traditional sort of method of investing my super I'm just using this as an interim measure to sort of ride through this sort of boring capressed boring capacity situation and not compromise on the quality of the asset. But there's some complexities with it, so of course people should go off and get some good quality advice, make sure it's set
up correctly, all those sorts of things. But it's one of the things that we should keep in the back of our mind that's worth at least considering for some people. As I said, the quality of your asset will determine your future returns, So quality is really important thing to focus.
I don't nothing actually went wrong at any point, but is there apart from the fact that sooner or later, as I said, because all joint ventures you know, as they say, if you start a joint venture, you want to think about how it ends. But apart from that, is there any other flaw or trap that this co investing structure could create.
Look, it's not ideal from a purely from a super perspective because it's investing on an on an ungeared basis, and so its returns will be the net rental income, which isn't going to be a huge in percentage huge amount percentage terms, and the future capital growth of that asset, which you know is a bit of an unknown. So I think if in isolation, if you said, should my super fun do this, you know they're probably a better
alternatives investment alternatives. But if you look at it from a total portfolio level, so you know that super is one of my assets, well then I think it has merit. And the other down side is just the cost and complexity. Of course, you've got to set up a self marie super fund. If you don't have one, run it and then you've got to deal with all the transactional sort of stuff. So I'm not going to sit here and
pretend it's not a super simple structure. But again it still has still could have merit for some people.
Is there any resistance inside the banking system to it.
Well, that's the challenge is you can't use the actual the property that you're co investing with your super fun as security. So you've got to have You've got to have equity and other property. So in your example of the individual buying four hundred thousand of a five hundred thousand dollars property, I would need to borrow that four hundred thousand dollars against my home or another investment property. That property remains ungeared, so the lender doesn't really need
to worry about the arrangement so much. But you do need to have equity in existing property and make it work.
Yeah, so rock bottom folks probably on your home and it wouldn't want to be already more too heavily all right, but very interesting, worth knowing, worth exploring. Okay, we have some great questions and I want to get onto them quite quickly, so we will do that right now. After the break Hello, Welcome back to the Australian's Money Pozsan podcast. I'm James Kirby with Stuart Whims of pro Solution, regular contributor of course to the Australian's Worth section. So let's
go with the first question for Bob. Would you like to read that one? Stuart?
Sure? Yeah, So Bob writes, my wife and I got married early last year. We are both in our forties and we both have independent businesses. My wife needs to be in the city for work and I need to be in the country. We see each other on weekends. I have a house in the country that I've lived in and owned for fifteen years, but we're looking at buying a house in the city together with the same
working and living arrangements. What are the tax implications. Can my wife claim the city house as are primary residents and me can claim that my house in the country is my primary residence. I want to avoid being hit with a CGT bill on either of property properties if we sell them.
Yes, it's very interesting. Remember this is not advice. This is information only for all the Bobs out there who have the complexities of living in two places. I've been intrigued to hear what the answer is. I think I know what the answer is, but I'm not sure what's the answer.
The answer is James that if you have a spouse or de facto that you can only claim one main residence. But it is possible that Bob, for example, can claim fifty percent of the country house as his main residence and his spouse can claim fifty percent of the city dwelling, although that probably is an ideal, which I'll get to in a second. The other thing Bob needs to think about, so I guess the short answer is he's going to have to choose which of those assets is to enjoy
the main residence exemption. The other thing he needs to think about they need to think about is land tax. Now we're not sure which date bobber is in, so that land tax is a state based tax. You'd have to check the rules, but that would be another consideration. I'd be thinking about not only capital gains tax, but if I'm not going to claim, if one of them is not going to be my main residence, I need
to think about the land tax consequences as well. So I mean, if the country property had a lot of land value, for instance, maybe you want that one to be your main residence to avoid the land tax. But essentially, I think in Bob's situation, what I would try to do is pick which property you'll most likely to sell in the future. And so if I read between the lines, maybe if the wife needs to be in the city just for work, possibly they might sell that asset when
the wife retires. In that case, I would claim the city property as their main residence, so that down the line when I go and sell, and I'm not going to pay any capital gains tax on the basis that maybe if you plan to reside in the country house for forever, for as long as you can, you know you're not going to pay potentially not going to pay any capital gains tax, although your state will eventually.
So A key point for listeners is the primary residence doesn't have to be the one you live in the most. It's the one you for tax purposes, you just must declare one as the primary, but it doesn't have to be the one you're in six days out of seven. Is that true?
You've got to be careful though that. I mean that is true from a capital gains tax perspective, but land tax can be different.
And again yes, now, but the point I'm making is that the primary resident doesn't have to be the one you live in the most. No one cares about that. Is that actually accurate? It's correct? Okay, right, so keep that in mind. I hope that's useful to you, Bob, and best of look with it all. That sounds like a nice lifestyle, doesn't it. Swinging in the city. I'd like to do that, okay, Charles. I love the podcast. I have listened to every episode. Thank you, Charles. I
get that sometimes and it's lovely to see. Regarding your podcast regard discussing bank of Mom and Dad long agreements. In my experience, the key reason for structuring these agreements in a commercial manner and enforcing them is to protect the funds in the event of a relationship breakdown. If the money is given as a gift, it becomes part
of the couple's marital assets and maybe divided accordingly. However, if it is documented as a properly enforced loan with commercial terms, it remains a liability to other than an acid, reducing the risk of it being included in a properly settlement. Yes, thank you for spelling that out. So clearly, Charles, I suppose I got a little bit distracted on this bank of mom and dad think on the basis that even
if you had a loan, you'd never enforce it. This is making the very apt point that this is really where it all comes to the crunch and these agreements, that if you had one and then the couple broke up, and let's say it broke up badly and it was a bad, messy divorce as they call it, and it was the case that there was a push by the family who had given the gift to protect that asset, then they could and mount a case to do so much more strongly if there was a long agreement. Yes,
so thanks for that child. It's very I imagine, a very accurate call on the whole thing.
I'll just add to that, James. One of the other approaches you could take, it's a gift with strings attached.
These are also easy to talk about in theory. These are also easy to talk about the theories you sit down with your and also trying to do this.
Yes, well, the downside is in this sort of gift arrange with the loan arrangement, which some of my clients have done, is that you've got to be really careful to make sure that both parties, your child and their spouse understand it is a genuine loan that maybe one day you'll call upon it, because the argument could be made, look, it's not really alone. The parents never intended to call
upon it. So a better approach, a much safer approach, is to say to your child, I'm going to give you half a million dollars whatever it might be the gift, but if you are into a relationship, you must arrange a binding financial agreement. And if you're an arrangement now, if you're in a relationship now, you must do it now, and the parents can pay for it because it's expensive.
But that would be then as far as I understand, a water tight way of ensuring that capital is protected, and the binding financial agreement would say exactly.
That it's a property pre nup exactly right, Yep, with all the cultural complications such agreements involve. Ok, but thank you for that extra idea. It's perfectly smart. I don't know if it's any easier in real life. Stewart, Okay, what is the next one? Andrew has something to say? Do you want to read that one?
Yeah? And Andrew writes a little bit overd you, but thank you for a cracker of a summer series, solid guests and great content delivered frequently. I have successfully encouraged three friends to subscribe to the podcast so that your general information can have a positive impact on their lives.
How about that you like that because you were part of the summer.
Soon, Andrew Smith. It sounds like a really smart guy.
And thank you, Andrew. And of course I subscribe to the podcast is free folks, so don't worry about subscribing, just just listen or download. But at one point I do want to make about that I this year, that is we're now in February, during the summer break. This year, what I did was a series of outlooks of the year ahead, and of course Stewart here was part of that because he did the property outlook the previous year.
I tried something entirely different, which was I did a series of what I thought was like summer ideas, so that they were less kind of hard nose finance and more what you might do with your money, how to spend it basically. So we did something on collecting wine, we did something on collecting classic cars, that was an interesting sort of exercise as well. What I'm trying to say is i'd have to know what you prefer. Let us know because it's your show and I'm wide open
to your ideas. So let us know, folks in the email. Okay, now, Mark final question. If you have an investment property, then the interest payments on the investment loan or tax deductible. However, if you redraw to pay for something that is not an investment, then you can't claim that portion of the interest. True, Mark, So he says, is the reverse true for a home loan. If someone is to redraw their home loan to buy investments,
can they claim that portion of the interest? Yeah, clever, Mark, And I noticed so many of our listeners think like this. They kick the ball around and say, if you can do this, can you do that? Often it would logically be so, but it's not the case. What's the story with Mark's proposal? Yes?
So, Mark's asking if he read drew a certain amount at if he's homelan, so he's non tax reductible home loan and say invested in a ATFS, would that portion of the loan that attracts interests? Would that interest be tax deductible, and the answer is yes.
But all of the tax implications would also be portioned to abortion portion, right, that's the I want to make that clear.
So the one hundred thousand that attracts an interest, if it's six percent, six thousand dollars a year, six thousand will be tax deductible. The rest of the interest, of course in that loan will be not tax deductible. But it's a really good question because what Mark and all the listeners need to understand is that if you go to make a repayment against the loan that has mixed
purposes in it. So in mark situation, some investment and some home you must apportion the repayment proportionately across those purposes. So then of course Mark's going to go to want to repay his home loan, but he can't do that. He's got to repay, you know, a portion of the one hundred thousand used for ETFs, and then a portion goes to the rest of the home loan. And that's why you must must never ever mix purposes in a loan.
So so if you have a deductible and non deductible and even from investment perspective, because you lose the flexibility to choose which part of the loan you want to or you're able to repay.
And to put it very simply, doesn't he dilute the capital against tax exemption that was there all the time on the will as well? I wan't that hit him in the long term. The dea goes to sell the house, this little exercise on the side will come back to buy it, won't it.
No, it won't change the main residence exemption because the actual asset doesn't change. And you can borrow against a home for investment purposes. That's not going to That's fine, that's fine. It's really just about the ability to repay. Now, what most banks can do is later to split out a loan so he can approach his bank. If he's got one hundred thousand of redraw, he could split that into two accounts, and that's relatively easy to do for most banks, and so you don't need to refinance or
muck around or do anything like that. That would be a much cleaner way of doing something like that. But absolutely you can use you can use that equity in your home to invest.
I suppose the problem for Marker and all the marks out there is you don't know, you know, when you take out the mortgage at the start, you don't know whether you're going to what how much you're going to happen to play with. You might be supposed you heard Annie and so a split loan, he'd have to make the decision. Cool if you like, that's what the split is. When he doesn't really know what the split will be.
No, so you can only do it sort of down the track or at the time when you want to make those investments. And the other complication is, you know, you've got to speak to your registered tax agent about these things. Not all mortgage brokers and particularly bankers will know about this. Most bankers go, oh, yeah, that's fine, that's tax seductible. But don't take tax advice from a mortgage broker or a banker. So you need to take
it from a registered tax agent. But it's a really great question because understanding kind of the how loans and tax operate together a critical I mean, you know, you don't want to compromise a tax reduction, of course, and so making sure you set it up in the correct way. He's going to make sure that you're going to benefit.
From that very good. There were a great batch of questions really terrific. Thanks everybody, and thanks Stewart for coming on the show today. Good to have you, Stewart, Thanks very much.
They were great questions, Yeah they.
Weren't they all right, keep them rolling, folks. You know the email address the money puzzle at the Australian dot com dot au. Today's show was produced as always by Leah Samuel Glue. What you've seen