# Negative Gearing versus Super Salary Sacrifice



## Spanning Tree

I have a friend named Frank. He's a bit of a bogan, but he talks a lot about property investing. I suspect he does this to compensate for his bogan image.

Frank was talking to me and my friends before about how borrowing to buy investment properties is a good idea because if the rental income from the property is less than the interest repayments, you can negatively gear and claim as a loss to reduce taxes paid.

Many of my friends were impressed with Frank when he said this, but why would anyone do this? If you want want to reduce your taxes and have a good long-term investment, why not simply salary sacrifice into your super fund? By salary sacrificing into your super fund you can reduce your income tax to 15 per cent and put it into a long-term investment. Plus you bypass debt and money in super incurs lower fees than money in an investment property (e.g. lawyers fees, real estate agent fees, stamp duty, etc).

So wouldn't super salary sacrificing be a lot cheaper and simpler than negatively gearing an investment property, or am I missing out on something?


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## pepperoni

Spanning Tree said:


> I have a friend named Frank. He's a bit of a bogan, but he talks a lot about property investing. I suspect he does this to compensate for his bogan image.
> 
> Frank was talking to me and my friends before about how borrowing to buy investment properties is a good idea because if the rental income from the property is less than the interest repayments, you can negatively gear and claim as a loss to reduce taxes paid.
> 
> Many of my friends were impressed with Frank when he said this, but why would anyone do this? If you want want to reduce your taxes and have a good long-term investment, why not simply salary sacrifice into your super fund? By salary sacrificing into your super fund you can reduce your income tax to 15 per cent and put it into a long-term investment. Plus you bypass debt and money in super incurs lower fees than money in an investment property (e.g. lawyers fees, real estate agent fees, stamp duty, etc).
> 
> So wouldn't super salary sacrificing be a lot cheaper and simpler than negatively gearing an investment property, or am I missing out on something?





Ips *can* be sold in a few months ... super cant be touched.

Having said that, I know a fair number of people worth 5m plus ... NONE of them have any investment property.  ALL of them put huge amounts into super ... entire bonuses etc.

One of them told me that his self managed super was only really worthwhile once he had more than $3m in it.

In your 50s my understanding is your best investment is maxing it out if you arent fully enslaved by your bank.

IPs are alot of grubby work for the return ... rich people dont bother when they can get a good result other ways.

Also if you are buying and holding property forever with no intention of living in it and getting PPOR cgt exemption (the typical property bull model) you would be better off getting IPS with your super fund (which I understand can borrow for this purpose).  Most property bulls are not this smart though.


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## Sir Osisofliver

Spanning Tree said:


> Many of my friends were impressed with Frank when he said this, but why would anyone do this? If you want want to reduce your taxes and have a good long-term investment, why not simply salary sacrifice into your super fund? By salary sacrificing into your super fund you can reduce your income tax to 15 per cent and put it into a long-term investment. Plus you bypass debt and money in super incurs lower fees than money in an investment property (e.g. lawyers fees, real estate agent fees, stamp duty, etc).
> 
> So wouldn't super salary sacrificing be a lot cheaper and simpler than negatively gearing an investment property, or am I missing out on something?




Sir O shakes uncontrollably, and turns muscular and green whilst muttering the fateful words... You wouldn't like me when I *lose control*.

Initiate rant mode...

rant mode...engage

{rant}

Where does superannuation go?  Unless you have your own SMSF it goes into the hands of fund managers. You just LOST CONTROL.  I've said it before and I'll say it again...anyone who invests in managed funds need to be repeatedly slapped across the face with the words "value destruction" yelled loudly in their ear.

Here are the reasons why.


EMH - Check out any finance based course/ free learning material and you will find the concept of efficient market hypothesis. There's lots of material on it...go look it up. I'm not going to turn this post into the theory behind EMH when you can easily go look it up if you are interested.

Not everyone thinks that EMH is 100% valid...I don't. Examples can be found every day in the market that it is not 100% efficient. All sorts of ideas have come out in opposition to EMH like behavioural finance for example. Even the use of technical, fundamental, and qualitative analysis seems to say that inefficiencies can be found and that we can "beat the market".

But regardless of what you think of EMH, whether it is 100% valid or not, studies have been done since the 1930's that in general - *professional investors are UNABLE to outperform the market over time. *

Now read that last line again...and again and repeat after me..

A fund manager (and that includes the guy who is looking after your super) who beats the market by 1% will strut round the office with the satisfaction of a job well done and his performance bonus in the bag ...... *even when his portfolio falls in value. *

There is also a whole area of research that has been done here to find out why fund managers, with all their advantages cannot consistently beat the market with such concepts as time and volume slippage, stock borrowing etc. If you are interested...then go look for it.

Here comes the next kicker. Managed Expense Ratio's or MER's.

So this professional investor needs to get paid somehow right? And it's probably not happening via the long business lunches he has with company directors trying to convince him that they are the next big thing on the market. Instead there is this thing called a managed expense ratio, where the fund manager will take his pound of flesh from your investment before anything else happens. Some MER's are fairly small (for example in an index tracking fund because the monkey behind the fund just needs to push the buttons to reweight the portfolio every quarter) and some MER's are not so small. (Guess which way the MER swings in the captive market of superannuation fund management). Go on go get your latest super statement and check it out. But lets say the MER fee is 1% shall we?

A long-term average performance indicator of the share market is about 11% - so you'll double your money every 6 to 8 years. So $50,000 invested today in the market and allowed to grow will through simple compounding become $679,273.19 in 2033.

The same $50,000 invested with a fund manager charging a simple MER of 1% (and I'm ignoring entry fee's, exit fee's, performance fee's and any other damn fee they can think of including looking at me funny pal fee) will net you - $541,735.30. 

I'll just wait for that to sink in..$137,537.89 difference in performance over the same time period. But wait you say surely most of that is due to the fact that less money is available for the benefits of compunding..... well sure some of it is the cost of not having those funds invested into the market, but the fund manager has still been able to collect a healthy $55,000 in fee's from you over the years for something that you could have done yourself with a miniscule amount of effort.

On negative gearing....

There is Good debt:engel: and Bad debt:evilburn: - but debt is debt, so you must always ensure that you can service the loan. But negative gearing is not my preferred tax minimisation strategy. I much prefer the use of Trust structures to achieve the same ends. However I could write novels of trust structuring mechanisms and this post is long enough...go DYOR.

{rant mode end now}


I need a drink

Sir O


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## Spanning Tree

> Where does superannuation go? Unless you have your own SMSF it goes into the hands of fund managers. You just LOST CONTROL....
> 
> But regardless of what you think of EMH, whether it is 100% valid or not, studies have been done since the 1930's that in general - professional investors are UNABLE to outperform the market over time.




Relax, man. Many super funds follow indexes, e.g. Vicsuper and certain investment options from Sunsuper such as SSgA Australian Equities Index whose MER is 0.15 per cent. Can property beat that?


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## theasxgorilla

pepperoni said:


> IPs are alot of grubby work for the return ... rich people dont bother when they can get a good result other ways.




Is this really so?  Just curious.  I personally find the idea of IPs not worth the hassle...but then again I'm not rich either, so I don't know if I can afford myself this luxury.


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## pepperoni

theasxgorilla said:


> Is this really so?  Just curious.  I personally find the idea of IPs not worth the hassle...but then again I'm not rich either, so I don't know if I can afford myself this luxury.




Same ... not worth the hassle ... finding them, investigating them, buying them, maintaining them, doing their tax ... ugh.

My dad had one and never again ... he was able to do well enough by other means.

You have to put a price on your time ... when you make 1k - 2k a day you value your weekends/downtime appropriately.

Taking it the next step if you were set for life why on earth would you bother .... stick it in a good managed fund or simply an index fund and live your life!


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## Julia

I don't think you can absolutely generalise about investment properties.
I made a lot of good money from this back in the 80's where high inflation sent the capital values rocketing.   Rentals were in short supply at the time so it was possible to get good tenants paying high rents.

Downside was very high interest rates (22% on second mortgage).  All up, still very profitable.

But I wouldn't want to be in it under present circumstances.  Returns are just too low.


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## Happy

Spanning Tree said:


> Relax, man. Many super funds follow indexes, e.g. Vicsuper and certain investment options from Sunsuper such as SSgA Australian Equities Index whose MER is 0.15 per cent. Can property beat that?




Ye ye, MER is 0.15 per cent plus this plus that (from their site):
http://www.sunsuper.com.au/products/fees.cfm


For the Sunsuper Balanced investment option: 
● $1.00 per week member fee, PLUS 
● administration fee of 0.05% p.a. of your account balance, PLUS 
● estimated investment base fee of 0.55% p.a. of your account balance, PLUS 
● estimated investment performance fee of between 0% p.a. and 0.24% p.a. of your account balance. 
● 


For the Sunsuper Conservative and Growth investment options*:
● $1.00 per week member fee,PLUS 
● administration fee of 0.05% p.a. of your account balance, PLUS 
● estimated investment base fee of between 0.36% p.a. and 0.65% p.a. of your account balance, PLUS 
● estimated investment performance fee of between 0% p.a. and 0.24% p.a. of your account balance.


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## 2BAD4U

Don't like super, never have and never will. I've even studied finance at Uni and still can't be convinced that super is a good thing.

I have made more money in the last 4 years with investment properties (including allowing for negative gearing and CGT) than I have with 20 years worth of super.  History shows that houses double in value approximately every 8 years, how many super funds do that.

The other benefit is if I fall on hard times my properties are a liquid asset that can be sold quickly.  Try getting money out of super if you fall on hard times.

As far as I am concerned there are a lot of people out there who think that the 9% their employer pays for them is going to set them up for retirement. Well they are in for a big shock at age 65.  I'll keep doing it my way because super will buy me an 4WD and caravan and there won't be much else left over to live on.

As for the hassle of owning investment properties, get yourself a good property manager.


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## Spanning Tree

> Ye ye, MER is 0.15 per cent plus this plus that (from their site):
> http://www.sunsuper.com.au/products/fees.cfm
> 
> 
> For the Sunsuper Balanced investment option:
> - $1.00 per week member fee, PLUS
> - administration fee of 0.05% p.a. of your account balance, PLUS
> - estimated investment base fee of 0.55% p.a. of your account balance, PLUS
> - estimated investment performance fee of between 0% p.a. and 0.24% p.a. of your account balance.




All investments have costs. It's the magnitude of the costs that matter.

The investment base fee is the MER. The MER of 0.55 per cent only applies for the balanced fund. The SSgA Australian Equities Index Fund has MER of 0.15 per cent. Since this is an index fund, it has no performance fee either.

Add the admin fee of 0.05 per cent and you have total fee of 0.2 per cent plus $1 per week members fee.

There is also the spread of 0.2 per cent.

Remember that super is compulsory, so no matter what you will be paying the fixed admin fees. You cannot opt out of it unless you go with an SMSF, but even that has other costs.

Since super is compulsory, you cannot avoid the fixed costs, and so when comparing between super and investment property you must not consider fixed super costs since you will be paying it even if you invest your extra money in investment properties.



> History shows that houses double in value approximately every 8 years, how many super funds do that.



It is possible in theory for super funds to invest in houses. Many certainly invest in commercial real estate.

Nevertheless, this idea that houses double ever 8 years sounds suspicious. According to Robert Shiller, inflation adjusted average annual house price increases in the Netherlands for the last century has been 0.2 per cent.

Charts for US house prices show a lot of volatility and many periods of stagnation. The same applies for Australian house prices. From the start of the last century till 1950 (a 50 year period) there was no increase in house prices in Australia.

Of course, if we are selective, that is, we pick only Australian houses and then focus only on the last 30 years, we will certainly see good growth. However, if we have the liberty to be selective about specific investments at specific time frames, why not leverage into Fortescue Metals Group before the commodities boom? Australia's richest man, Andrew Forrest, made his billions doing this.

Remember you will never know whether the specific house you pick will be a poor pick. What if change in zoning laws result in hundreds of factories popping up around your house? What if demographic changes result in higher crime? At least with a super fund, a collective investment scheme, you get instant diversification across stocks, real estate, bonds, and others asset classes.


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## Happy

If our leaders are so concerned about level of super and that we do not save enough, there should be tax-free contribution and should be managed by not for profit Co without fat cats skimming huge amounts in fees and charges.

Good old saving account should have tax exemption on inerest.

Of course could be means tested and of course if our leaders are concerned with national savings level.


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## Spanning Tree

Personally I think there should be no compulsory super. I think fund managers make a lot of money from management fees. Also, super assumes that people actually want to save up for retirement and it forces people to save up. In a free country, I believe that if you don't want to save, why should you be force to?


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## Julia

Spanning Tree said:


> Personally I think there should be no compulsory super. I think fund managers make a lot of money from management fees. Also, super assumes that people actually want to save up for retirement and it forces people to save up. In a free country, I believe that if you don't want to save, why should you be force to?




Because if people don't make some effort to support themselves when they are no longer working they are a drain on the public purse.

This is particularly relevant with our increasingly older population and would mean higher taxation for everyone who is working to fund age pensions.

And you may have noticed the considerable fuss recently about the age pension being below the poverty line so it's in your own interests to save for retirement.

We are a nation of poor savers.  If super was not compulsory few people would be funding their own retirement.


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## 2BAD4U

Spanning Tree said:


> Personally I think there should be no compulsory super. I think fund managers make a lot of money from management fees. Also, super assumes that people actually want to save up for retirement and it forces people to save up. In a free country, I believe that if you don't want to save, why should you be force to?




Are you for real????

Without compulsory super I would hate to be a taxpayer in 20+ years from now.  As Julia said, the drain on the public purse would be huge and why should taxpayers be forced to support people who didn't plan for their future.


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## Spanning Tree

I suppose I am optimistic that people have personal responsibility and will save for retirement themselves.



> History shows that houses double in value approximately every 8 years, how many super funds do that.




Here's what Warren Buffet thinks about the current economic crisis:



> [Buffet] called the current crisis an economic Pearl Harbor, requiring immediate action. Its biggest single cause, he explained, was the real estate bubble. "Three hundred million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently," he said. "Lending was done based on it, and everybody did a lot of foolish things."




http://www.iht.com/articles/2008/10/06/business/buffett.php?page=2


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## Temjin

Julia said:


> Because if people don't make some effort to support themselves when they are no longer working they are a drain on the public purse.
> 
> This is particularly relevant with our increasingly older population and would mean higher taxation for everyone who is working to fund age pensions.
> 
> And you may have noticed the considerable fuss recently about the age pension being below the poverty line so it's in your own interests to save for retirement.
> 
> We are a nation of poor savers. If super was not compulsory few people would be funding their own retirement.




I agree. Most people, at least in Western countries, are no where near disciplined enough to save for their own retirement. As 2BAD4U has said, I would HATE to be a taxpayer too in 20 years if every baby boomers will be asking for higher and more pension payments that they think they deserved so. I would simply leave the country and leave them starve. Why am I paying for their lack of responsiblility anyway? 



> History shows that houses double in value approximately every 8 years, how many super funds do that.




Another person fall into the recency bias effect. Perhaps if we go back to 1970 and we used the 1940 to 1970 house price growth chart, that claim would be totally unrealistic. Past performance is no indicator for future return! 

As for super, it is simply one of MOST TAX EFFECTIVE structure that one could be in to invest for their future retirement. Yes, fund managers have historically provided a lack of value to their investors due to their excessive fee. It's almost always better off to buy a passive fund that track the index instead. But can we seriously expect EVERY AUSTRALIANS would have the ability and disciplines to manage their own investments? Less return is better than no return which would, again, drain the government fund for pension handouts because they couldn't manage their investment properly. 

There is no better option for the "mass". Individually, and those who are sophisticated and disciplined enough, there are plenty more options to choose from. Self-managed super has got a lot more cheaper and easier to set up since then. The $3 million minimum balance IS WAY TOO MUCH and does not apply now in realistic sense.


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## Sir Osisofliver

Temjin said:


> As for super, it is simply one of MOST TAX EFFECTIVE structure that one could be in to invest for their future retirement. Yes, fund managers have historically provided a lack of value to their investors due to their excessive fee. It's almost always better off to buy a passive fund that track the index instead. But can we seriously expect EVERY AUSTRALIANS would have the ability and disciplines to manage their own investments? Less return is better than no return which would, again, drain the government fund for pension handouts because they couldn't manage their investment properly.
> 
> There is no better option for the "mass". Individually, and those who are sophisticated and disciplined enough, there are plenty more options to choose from. Self-managed super has got a lot more cheaper and easier to set up since then. The $3 million minimum balance IS WAY TOO MUCH and does not apply now in realistic sense.





*sigh*  Temjin I quite agree. MOST people are too stoopid. That is the reason why our nanny state says we MUST have mandatory contributions.  But most people here aren't most people. At least they are willing to learn and try and take control of their own financial future. Quite frankly though if Super it wasn't MANDATORY...I wouldn't be doing it....and not because I wish to suckle at the public titty when I'm wearing my adult diapers and propositioning the nurses in my old age home.

It boils down to a simple question...

Over the longer term...which wins.....appropriately applied leverage...or tax advantage? Why do you think they are trying to fiddle with the current status quo and allow a limited amount of borrowing under special circumstances in Super Funds? 

Feel free to run the numbers (as I don't have time to do so right now and must dash into a meeting), but I think you'll find that leverage always wins (especially if you can stick it in a trust structure and take the benefits of franking credits and the tax deduction of interest payments).  Feel free to try and prove me wrong though.

Sir O


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## Temjin

Sir Osisofliver said:


> *sigh* Temjin I quite agree. MOST people are too stoopid. That is the reason why our nanny state says we MUST have mandatory contributions. But most people here aren't most people. At least they are willing to learn and try and take control of their own financial future.




That I perfectly agree. Anyone who even ventured on this forum would have at the very least, take an active interest in their own personal finance and be more sophisticated than the rest of the population.



> Quite frankly though if Super it wasn't MANDATORY...I wouldn't be doing it....and not because I wish to suckle at the public titty when I'm wearing my adult diapers and propositioning the nurses in my old age home.




Exactly the same situation for me. I have better use for the "compulsory contributed fund" in my superannuation account than having it invested by fee sucking managers who always go on long. I have completely minimised my compulsory/voluntary contributions anyway. 



> Over the longer term...which wins.....appropriately applied leverage...or tax advantage? Why do you think they are trying to fiddle with the current status quo and allow a limited amount of borrowing under special circumstances in Super Funds?
> 
> Feel free to run the numbers (as I don't have time to do so right now and must dash into a meeting), but I think you'll find that leverage always wins (especially if you can stick it in a trust structure and take the benefits of franking credits and the tax deduction of interest payments). Feel free to try and prove me wrong though.
> 
> Sir O




That really depends on a lot of assumptions. Like the tax bracket in which the person is in, the amount of leverages employed, the securities that are invested in, the length of time invested and obviously, the expected return as well. I do have a case study material that go further in this, will have to dig it out. (again, lots of assumptions made in that case study too)

But generally, yes, I agree with appropriate leverage and in a trust structure, leverage is likely to win over the long term. Why they initially banned leveraging in superannuation structure and why they are not relaxing them is not an area of my expertise.  Though leverage + superannuation structure beats everything else FOR THE AVERAGE PUNT ONLY.


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## Tysonboss1

Spanning Tree said:


> In a free country, I believe that if you don't want to save, why should you be force to?




Because alot of people won't save unless they are forced to,.... and the fact is whether you like it or not most people eventually get to an age where they can no longer work productivly and with out savings become a burdon on society.


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## ROE

Spanning Tree said:


> Personally I think there should be no compulsory super. I think fund managers make a lot of money from management fees. Also, super assumes that people actually want to save up for retirement and it forces people to save up. In a free country, I believe that if you don't want to save, why should you be force to?




Society as a whole is better if the country can save more money... you dont want to live on debt .. Look at the American they are full of debt at nation and personal level, lot poverty over there despite they are the strongest economy. Debt has a price and at some point in time that price need to be paid .

the more people has saving for retirement the less your kids and grand kids has to pay for tax to support the aging population. 

and stuff  about superfunds making lots in fees is just not true, you can pick your own investment and it cost little. Check out industries super fund it would cost you no more what you would pay comsec to buy and sell shares or to run your own fund. There is regulation around how much fees fund manager can take and up to what percentage of your fund total.

saving is not that tough, you don't have to miss out on anything to save, you just have to change your habit a little.

The key is discipline and don't buy things you don't need and do it regularly so it becomes a pattern, start off with 3% then a couple months later increase to 5%, a year later increase to 10% and keep up the pattern
I say 3-4 years down the track you can increase that to 20%-40%
of your income depend on your capacity to discipline 

with that pattern and a bit if sensible investing you can have a massive retirement nest without the need to borrow or going into much debt


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