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Property, Superannuation

Super contributions better option than negative gearing

Concessional contributions into superannuation are a less risky way to invest for retirement than negative gearing into property, while offering similar tax deductions, a Sydney-based financial adviser has claimed.

HLB Mann Judd Sydney wealth management partner Jonathan Philpot said negative gearing was a popular method for people to secure assets for retirement that offered a tax deduction, but it carried a higher risk and had no guarantee of strong return.

“A negative gearing strategy can pay off if the value of the property appreciates enough over time to deliver a strong capital gain, but this isn’t always the outcome. And the capital costs of running and maintaining an investment property can be high,” Philpot said.

He also countered the view that superannuation was locked away from use until retirement by pointing out property also locked up capital and usually had to be retained for the long term to achieve positive returns.

“While it is true that superannuation is locked away until retirement, property is far from an easily accessible asset,” he said.

“Property is an illiquid asset and investors can only access the capital upon the sale of that property.”

He pointed out income generated from rent is generally low and often equalled around 3 per cent a year, but was often being used to make loan repayments on the property.

“For a property investment to achieve its potential it should be at least a 10-year holding, meaning the wealth invested in a property can also be viewed as ‘locked away’,” he said.

He added negative gearing strategies were often being used by people in their 40s as part of their preparation for retirement, but could be replaced with concessional contributions into super from that age.

These would build a retirement balance with lower risk, that required no repairs or maintenance work and that was also in a more tax-effective environment, he said.

“Given the restricted concessional contribution limits of $25,000 a year that now apply, people can no longer deposit a large lump sum into super, but rather need the benefit of time to build up their superannuation balances,” he noted.

“The smart strategy is to begin this from the age of 40, with the aim of building a super fund up to the $1.6 million balance cap limit.”

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