Push your savings up one or two gears
Given the ongoing uncertainty about the future tax treatment of superannuation, investing in the family home and gearing investments now offer more certain benefits, especially to younger taxpayers. Most importantly, paying off the family home as quickly as possible offers many benefits, including tax-free capital gains, access to savings at any time and as collateral for tax-deductible investment borrowing.
Owning the family home outright for a day and then re-borrowing against it on an interest-only basis to fund investments has always been an attractive strategy. Doing this ensures the interest payments are deductible at the relevant marginal tax rates, thereby ensuring after-tax debt servicing costs and cash flow demands are minimised.
By contrast, gaining large tax benefits from superannuation requires a large savings effort. With sufficient collateral to start, the ongoing costs of funding negative gearing are relatively low, with tax- only becoming payable only if the income from the investment rises above the annual costs or the investment is sold for a capital gain. These tax costs can be reduced by further gearing or not selling the asset.
With 50 per cent of capital gains on assets owned for longer than 12 months exempt from tax, the maximum tax payable on capital gains is now 24.5 per cent, well below income tax rates on other income.
Capital gains tax liability can be delayed indefinitely by retaining the asset and bequeathing it to beneficiaries. This enhances the attractions of negatively gearing a future residence even for existing homeowners, allowing taxpayers to obtain the capital gains tax-free benefits of selling the family home to pay off the investment loan when moving into this property.
No capital gains tax is payable on moving in to the former investment property, with any liability deferred until the new family residence is sold. This arrangement is also a great help to younger Australians using negative gearing to gain entry into the housing market. In this case, there's an incentive to reduce the outstanding investment loan prior to moving into the property as a residence, to reduce ongoing non-deductible loan servicing costs.
While gearing normally increases investment risks, this is less so when there is the potential use of the property as a residence. Unlike voluntary superannuation contributions, there's a further advantage of implementing a geared investment strategy.
Even if the tax advantages of the family home and negative gearing change in the future, these changes are unlikely to apply retrospectively. There can be no confidence that this will be the case for changes to superannuation tax arrangements.