Superannuation Discussion + market volatility

[andye]

No, and it ought not be

It’s because cashflow actually matters.

Where do people who borrow funds to pay for an asset find cash to pay tax?
That was the issue with employee share schemes. It’s all well and good to say “pay up” but how exactly do people do this when the money is tied up in an asset ?

I'm no fan of taxing unrealised gains but it's probably not great financial practice to have a really large proportion of assets in an undiversified illiquid form

 

[Brissy1]

optimistic valuers

Like Dr. shopping?

 

[andye]

If CGT wasnt grandfathered that way, there would likely be a tsunami of sales prior to July 2027.

This is assuming the Greens don't manage to limit the grandfathering in the Senate

I tend to think there will be a meaningful fall in property prices ( in Sydney at least) at some point over the next couple of years, but if the changes became retrospective, it could be much more

 

[SYD]

I tend to think there will be a meaningful fall in property prices ( in Sydney at least) at some point over the next couple of years, but if the changes became retrospective, it could be much more

Along with increasing rents as supply dries up…

 

[Mr_Tee]

All of this recent discussion on CGT implications is great and informative.

The common focus of discussion seems to be on selling an asset sooner rather than later to escape the new CGT regime. And that’s great.

However, once you have sold that asset you have a pile of cash. Then what do you do? You still need to invest in something to get some growth so your asset base doesn’t suffer diminishing value from the effects of inflation. So your choices broadly are to:

1. Stay in cash,
2. Put as much as you can into super to get the benefits of lower tax rates in super,
3. Buy a bigger Main Residence which remains tax free in all respects, or
4. ReInvest outside of super (in say personal names) and Lo and behold you are back in that new CGT regime that you set out to avoid in the first place.

If you choose option 4, then I’d ask why on earth did you sell in the first place, as you have paid CGT at the old rates, incurred significant transaction costs on both the sell and buy transactions and yet here you are now in the new CGT regime, with a capital base that has been eroded by tax and transaction costs. What was the point of it all?

If you have a longer term view, perhaps a solution is to “do nothing”. Just hold. And defer selling longer than what you would have planned upon. If you don’t sell you don’t pay CGT. Now I know this won’t work for everyone - particularly those in negatively geared properties who can’t absorb the cashflow hit - but it’s perhaps worth considering before advisers start telling us to churn our assets (generating fees for themselves) to somehow “escape” the new CGT regime.

Thoughts?

 

[andye]

Along with increasing rents as supply dries up…

Not so sure about that.

Every established property not bought by an investor, is bought by a homeowner (but with less competition maybe for a lower price than the vendor would like)

I guess that if future capital gains are anticipated to be lower, this might put pressure on rents as landlords look to run as an conventional investment with positive yield (despite negative gearing being gramdfathered) rather than a speculative asset.
However, rents (arguably) are already at a ceiling of affordability in many locations, so increases may not be feasible.

The bigger issue would be if the actual building of new properties is affected by negative investor sentiment (there's no point in negative gearing if house prices are going down)

Given new homes are needed (due to migration and for people unwillingly flat-sharing/living with parents) this will be important

 

[Quickstatus]

So your choices broadly are to:

5. Sell the investment property and either give some proceeds to kids to help buy house.
6. Sell the investment property to the kids, but give them enough of the proceeds so their LVR is reasonable.

Selling and buying in a low market is actually better selling and buying in a high market.
- lower costs due to lower CGT, Stamp duty, agents fees

Choice 6 wil not incur REA fees.

there's no point in negative gearing if house prices are going down)

Negative gearing still available for new builds.

Not so sure about that.

I suspect rents will go up marginally. Maybe 2-3%

migration

I suspect this will ease as well - especially with a slowing economy.


It is a better proposition for Mum and Dad bank who have to help the kids into housing.

 

[Mr_Tee]

5. Sell the investment property and either give some proceeds to kids to help buy house.
6. Sell the investment property to the kids, but give them enough of the proceeds so their LVR is reasonable.

They are valid points in certain circumstances but many people could not afford to do that, as good intentioned as they may want to be. For (5) they still have that (smaller) pile of cash with the question mark beside it.

 

[Quickstatus]

certain circumstances

lots of circumstances, as varied as the number of houses.

 

[Brissy1]

6. Sell the investment property to the kids, but give them enough of the proceeds so their LVR is reasonable.

The gift could be in the way of a "well priced" sale if it's to be his/her ppor. Win win. Supported by an official valuation of course... more "dr. shopping"
Not a serious suggestion.

 

[openseat]

Commencing after 1 July 2027. Sales before then are taxed under the current rules. I'm guessing there may be a rush to complete sales before then particularly from older Gen-Xers.

Most Definitely. This has really put a spanner in the works for succession and retirement plans.

 

[Quickstatus]

Supported by an official valuation of course

Exactly
Easy to do - Just ask the REA to value it for a "quick sale". Basically that is akin to the reserve price. Got to be reasonable otherwise the ATO will come poking around in the darkest corners and wake up the skeletons.

 

[andye]

Negative gearing still available for new builds.

It's available but what's the point of losing money every month, if the capital value of the asset is also falling. Would probably be fine as a long-term investment

 

[Quickstatus]

if the capital value of the asset is also falling

That comes back as depreciation.

 

[SYD]

It's available but what's the point of losing money every month, if the capital value of the asset is also falling.

Which is part of the argument for rents increasing.

The proposed regime means the cough falls out of the non-new investment property market. Very few investors will be interested in buying existing properties. That might be great for some first home buyers but does zip for renters.

New builds are years away, so if existing investors throw their hands up and walk away - where will the renters live?

I’m actually not convinced too many will rush to invest in new builds either knowing that the resale value won’t be like it has been in the past.

 

[andye]

Which is part of the argument for rents increasing.

The proposed regime means the cough falls out of the non-new investment property market. Very few investors will be interested in buying existing properties. That might be great for some first home buyers but does zip for renters.

New builds are years away, so if existing investors throw their hands up and walk away - where will the renters live?

I’m actually not convinced too many will rush to invest in new builds either knowing that the resale value won’t be like it has been in the past.

The point is that if more people become homeowners, there should be fewer renters, so should be in equilibrium (with a stable population)

New-builds need to continue to allow for migration and people currently unwillingly sharing with family/friends.

The problem (from the point if view of people not wanting house prices and rents to rise to unaffordable levels) arises if new builds dont keep up with that demand

(As an aside, property should remain a viable wealth creation strategy as it can be geared (positive or negative) providing property continues to rise (albeit more slowly) in the long-term.
It's psychogically much easier to gear in housing than shares Also, home loans are usually lower rate than investment loans and margin calls not an issue )

 

[tgh]

In the longer term, a change of government would almost certainly unwind the rules as they are.
Sailing through life should always consider a wind change…..

 

[Quickstatus]

existing investors throw their hands up and walk away - where will the renters live?

In the existing properties. If the rental market gets tighter, then rents will go up, but I suspect not by much.

a change of government would almost certainly unwind the rules as they are.

It might be a poison pill. The alternative wants to stop net migration completely (at least for a while) which makes the rental market vacancy rise - rents down, harder to sell.