The lowdown on super versus investment

What are you actually investing in?

Property is an asset that comes in different forms, including residential property, such as a house or apartment, and commercial property. You can purchase property directly, or you can hold it through a trust, company or super fund. In this article, we focus on a direct purchase of a residential investment property.

Super is an investment structure that allows you to invest in a range of asset classes, including cash, fixed income, Australian shares, global shares and property.

How much do you need to start investing?

One of the great features of super is that you don't need a lot of money to get started. You can contribute small amounts regularly, or make a large one-off contribution - the amount you save in addition to any employer contributions you might receive, is up to you.

Property isn't quite so flexible, as you will need to be able to afford the purchase price of the property you wish to invest in. Taking out a loan to help finance your property purchase over time can help with affordability, but you may still need to pay a large deposit and make loan repayments.

Are all your eggs in one basket?

Diversification - investing your money across different assets - may help you increase your returns and reduce volatility. Super allows you to invest in a mix of different assets. You can choose from the different investment options your super fund offers to build a portfolio that suits your goals.

What does it cost to invest?

Different super funds charge different types and amounts of fees. Whatever the fund and whatever the fees, government regulations require your super fund to disclose what you will be charged.

The cost of investing in property could include:

• the costs of purchasing the property, such as valuations, stamp duty, legal fees and property inspection costs
• ongoing costs such as insurances, rates, strata levies, and land taxes
• costs for repairs and maintenance
• property management fees, unless you are going to manage the property yourself
• other costs such as loan repayments, and the cost of eventually selling your property

Tax advantages

Both super and property offer tax advantages, but is one more tax effective that the other? Super's tax effectiveness comes through legislated deductions and co-contributions and generally concessional tax rates on returns and withdrawals. Income is taxed at 15% within super with capital gains only attracting 10% tax. Any lump sum or pension withdrawals you make from your after reaching age 60 are not subject to tax.

For property, you need to weigh up the tax benefits from investing in property against the costs of the loan you have taken out to finance your property purchase. As a general rule, you can claim a tax deduction for the ongoing expenses on your rental property. If you are negatively geared, and the interest on your loan and other expenses needed to maintain the property are greater than the rent or income you receive from it, you can also claim a tax deduction.

It is important not to let tax benefits alone drive the decision to make an investment. You should always consider first whether the investment makes financial sense, and it meets your needs and time frame.

Accessing your investment

One of the potential disadvantages of investing in super is that unless you meet a condition of release, you cannot withdraw your investment until you retire.

Property, on the other hand, can be sold at any time, however you may not get the price you the want and you are limited if you want to withdraw only part of your investment.

Both types of investments have their advantages and disadvantages. One of our financial advisers can help you ti weigh up your options and give you further information on the tax and other implications of each strategy. We can be contacted on 02 9894 9155 or by email at taggart@taggartgroup.com.au.

The information in this article was taken from the latest issue Colonial First State e-iQ magazine. www.colonialfirststate.com.au.