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HOW TO DO IT
SAM HENDERSON
I recently purchased for a client a one-bed ● Total equity manufactured (after renova- client invested approximately $50,000 in ● Increased cash flow (increased rental ment fees, which took six to eight weeks. Note: The holding costs will depend on the purchase
price of the property, rental return and current finan- cial position of the couple. The level of tax deductions will also vary depending on their income level. to get them there? They have $350,000 in super (his $200,000, These strategies can be used in any market, however my advice is for property investors $80,000 for him. She should salary sacrifice ue it is best to undertake the renovations to stick to metropolitan areas. Capital cities at least $13,000 a year, reducing her taxable shortly after purchasing the property. By income to $37,000 (a lower tax bracket) and doing this, the property will be revalued which means that they are not reliant on a saving her $3900 in income tax and boosting and sold in similar market conditions to the handful of industries to be sustainable. The her super with a contribution of $11,050 (after result is an ongoing supply of suitable ten- the chance that the added value would be ants for a well-selected investment property. For her, the TRIS is less effective as her super If you are undertaking a renovation strat- increase your super by $50,000 in five years, given the tax benefits afforded to pre-retirees. Actually you can achieve this balance and salary are lower. In fact the dif- within two years. But if you want to continue ference for her over five years is just $18,824, reinvest with a larger or similar budget if so yourself or appoint a project manager.
your strategy for the full five years, you could inclined and repeat the process to achieve Out of the choices available, I recommend more than double the amount, without having the $50,000 target if it wasn’t fully achieved the buy, renovate and hold strategy for the to live like a hermit. In fact, if we establish a greater benefit as his income and tax bracket empty nester couple as it gives them the transition to retirement income stream, or are much higher. In his case I’d recommend ability to generate increased wealth without TRIS, for each member of the couple, over five contributing the full $43,000 to his super fund as if you sell within 12 months your capital relying solely on market conditions.
years their super would be $156,222 better off. (remembering to account for his employer’s gains tax bill will be twice as much as if you In addition, they are able to use the increased Unfortunately, the vast majority of those superannuation guarantee amount of 9% that hold the property for more than 12 months.
equity in the renovated property to make HOW TO DO IT
legally is paid on the new income of $37,000pa) additional investments without paying the have not employed it, possibly because they thus reducing his taxable income to $37,000, and costs associated with selling while also don’t understand it or know how to set it up. paying $11,600 (including super contributions A buy renovate and hold strategy is designed But I have seen very few people for whom this tax) in tax instead of $18,630 (including super to increase the capital value of a property strategy does not have an immediate benefit.
contributions tax) – a saving of $7031 a year. and give the option of borrowing against the ly serious about increasing their wealth Put simply, the TRIS is like salary sacrificing Although his salary is reduced to $37,000pa, increased equity created. In this case the but with the added benefits of accessing funds remember that he can also draw back income property would be revalued after the renova- and use the leftover funds to invest in addi- inside superannuation. So how does it work? from his super of $8000pa (see table) to sup- tion to determine the increased equity and Salary sacrifice is where you can put up to plement this. The couple's after-tax income then held as an investment property. Here, $50,000 of your salary (for over 50s, or $25,000 drops but is still a healthy $78,700 a year. the empty nesters would also generate an for under 50s) into superannuation and pay just If both partners chose to establish a TRIS, PATRICK BRIGHT
improved rental return post-renovation.
15% tax instead of your normal marginal rates. over five years they would have an extra As in scenario two, this approach is based $156,222 in their combined super. They would ment benefit. You can’t access your tax sav- be saving a combined $9157 a year in tax and renovation, rather than being solely reli- ings until you reach a condition of release building their super for retirement.
ant on market conditions. Another benefit which includes: retirement over age 55, age 65, If you are worried about your investments of this strategy is that the empty nesters transition to retirement, financial hardship, inside your super fund decreasing in value, wouldn’t pay the “out costs” such as capital disablement etc. Effectively, your funds are thus reducing the benefit of a TRIS, do not gains tax, agent’s fees and legal expenses Minimum withdrawal from income stream of 4%pa (tax free) increases as income stream super balance increases with investment return. With TRIS, stop the TRIS. The solution is simply to change super is split between an income stream, on which no tax is paid, and an accumulation stream into which the SG and before tax contribution is made.
which would be required when selling the A transition to retirement income stream to a more conservative investment option or selling titles include The Insider’s Guide (TRIS) is a condition of release that allows a even cash to maintain the tax savings benefit. Instead the couple could draw on the prop- person aged 55 to 64 to draw between 4% and superannuation savings. (At age 65, you have superannuation, thus saving more tax, while In terms of your mortgage repayments, if erty’s increased value and use that towards 10% of their superannuation account balance reached a full condition of release so you no drawing a little out to supplement your income your taxable income remains above $37,000, buying a second property. The couple then each year to subsidise their living costs while longer need a TRIS – an account-based pen- (on a concessional tax basis). The higher your then you are better paying money into super- have the choice to sell the property and Property Investing. For more information attempting to maximise their concessional sion is more appropriate and more flexible.) salary and your tax rate, the greater the benefit.
annuation rather than paying the mortgage off. realise its capital growth at the height of a contributions (15% tax) to super, thus reducing A TRIS is like turbocharging your salary At retirement, you can then cash out money property cycle, or keep the rental income. their normal income tax and increasing their sacrifice because it allows you to put more into in super and salaries of $50,000 for her and from your super to pay off the mortgage.

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