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GUEST OBSERVER
Most Australians entrust their super funds to professionals but you can control your own superannuation and invest your contribution yourself.
Managing your super not only gives you the opportunity to take matters into your own hands, you may also save thousands of dollars on fees.
However, you need to know if managing your own super is right for you.
The biggest advantage of setting up your own SMSF is control. You can invest your money the way you want to – in companies, a property or a fixed interest term deposit.
You can choose among a wide range of investment options like direct mortgages, bank deposits, managed funds, direct property and shares.
Another advantage of DIY SMSF is lower fees. If you have over $300,000 in your superannuation, you may be able to operate your SMSF for less than the annual management fees of a company.
You can also use gearing and leverage to purchase assets like shares and property to expand your investment portfolio faster.
Remember that contributions to your SMSF are tax deductible so you can save more tax through franked dividend income and timing your capital gains carefully.
SMSFs also let you buy other assets for a maximum of 15% tax. SMSFs can continue indefinitely and family members may still enjoy this benefit even after the member's death.
However, you should be aware of the disadvantages, too. As a trustee, make sure you comply with super and taxation laws otherwise, you can be charged a hefty fine and even be imprisoned.
You also have to be savvy about investing to ensure that your SMSF is earning more than what a super company could earn. If not, you can choose to appoint brokers or advisors for a fee.
You will also be required to meet all record-keeping and reporting obligations such as transactions and contribution records and annual tax returns.
Just the same, you may want to ask the experts to handle this for a fee. Another downside of setting up your own SMSF is it may be less diversified than it could have been if handled by a superannuation company.
Note that gearing may add to the risk and though super funds sometimes come with insurance coverage, you still have to get an independent life, income protection and total permanent disability insurance that you need.
Do you think you can set up your own SMSF? Why don't you assemble a team of professionals, such as a lawyer, experienced investor, SMSF expert and financial partner to help you?
You can start with a solicitor, accountant, investment strategist and financial planner. Check their fees and accreditation and don't be afraid to get a second opinion.
ED CHAN is founder and non executive chairman of <a href="https://www.chan-naylor.com.au/" target="_blank">Chan &amp; Naylor Accountants</a>.
<a href="https://www.chan-naylor.com.au/contact-us/?utm_medium=propertyobserver" target="_blank">Click here</a> to schedule a chat or call one of their <a href="https://www.chan-naylor.com.au/contact-us/?utm_medium=propertyobserver" target="_blank">local offices</a>.
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How to decide if you should set up your own SMSF: Ed Chan

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GUEST OBSERVER 
If you are selling your home, you can claim the main residence tax exemption for the property you live in, including the land adjacent to it and other structures associated with the property like a separate garage or laundry. 
The main residence exemption includes compulsory acquisition of the main residence.
A residence or dwelling is a property used mainly for residential accommodation, including a cottage or home, a flat or apartment, a strata title unit, a unit located in a retirement village and a house boar, caravan or mobile home.
The land covered by the main residence exemption is close to, near, adjoining or neighboring the dwelling.
To be tax exempt, the land and dwelling should be sold together and the owner should have used the land mainly for private and domestic purposes with the dwelling. The total area should also not be more than two hectares. If it is more than two hectares, the owner can choose which two hectares will be exempt and the remainder will subject to CGT.
A home unit or flat usually comes with areas that are separate physically from the unit, such as a store room, laundry or garage.
If these areas were used primarily for private and domestic purposes associated with the unit, they will be exempt from CGT as well. However, if these structures are disposed separately from the unit or flat, the capital gain or loss will not be exempt from capital gains tax.
Ed Chan is founder and non executive chairman, Chan &amp; Naylor Accountants and can be contacted <a href="https://www.chan-naylor.com.au/">here</a>.
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Is your adjacent land or separate structure exempt from CGT? Ed Chan

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GUEST OBSERVER
The countdown to 1st July 2017 begins and people need to act now.
Starting 1st of July, superannuation legislation will change in Australia and everyone needs to understand how the changes will affect them.
Australians are encouraged to plan ahead with the upcoming super changes such as the $1.6 million transfer balance cap, removal of tax exemption for transition-to-retirement pensions, cut in annual concessional (before-tax) contributions cap to $25,000 and catch-up concessional contributions over 5 year period from July 2018, among others.
One advantage to the annual concessional before-tax contributions cap cut is the catch-up concessional contributions.
However, it will not start until 1st July 2018. Unused portions of the concessional cap every year will be allowed to be carried forward for up to five years if you have an account balance of $500,000 or less.
Australians who consider making super contributions starting July 2017 should know that the annual concessional before-tax contributions cap will be a lot lower than previous years, dropping to $25,000 from $30,000 for people under 50 and $35,000 for those over 50.
Starting 1st of July 2017, more Australians will pay double contributions tax (15% + 15%) because of the lowering of the income threshold from $300,000 to $250,000.
Those with adjusted taxable income of over $250,000 will have extra contributions tax and all concessional contributions will have 30% tax instead of 15%. Those in certain public sector funds will be hit with this extra tax which will raise $2.5 billion in four years.
According to the government, only a small number of affluent Australians will be affected by the superannuation changes.
The 2016 budget claims that the changes will affect only 4% of people in super but some disagree, saying it will impact a lot more people than the government expects.
Other issues include estate planning and succession.
Where the death benefit exceeds $1.6 million in estate planning, the excess should be cashed out as a lump sum. Those who wish to retain the superannuation benefits through reverting or paying a pension to their dependents upon inheritance will also be affected.
Those who are in second marriages and wish to make provision for children from a previous marriage will also be impacted.
People have already structured their estate to give pension to their children from their superannuation while the spouse can access the balance as well. With the $1.6 million cap, funds may no longer be enough to sustain the pensions and spouse’s standard of living.
The superannuation changes may be plugging revenue holes instead of building a sustainable system, which can provide for retirement adequately.
This may even result in bigger demands on public finances down the line. People may be discouraged to build their super and find other investment vehicles instead. They may turn to residential property investment but housing affordability remains an issue.
The good news is that superannuation will be more flexible for those with different work patterns as the new caps will be eligible for tax deductions.
This will be beneficial to those who salary sacrifice, who are self-employed and have part-time work.
 
Ed Chan is the founding partner of <a href="https://www.chan-naylor.com.au/" target="_blank">Chan &amp; Naylor</a>.
 
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Superannuation changes and their impact on estate planning and succession: Ed Chan

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GUEST OBSERVATION
Often when commentators use "income" to "property price" ratios and compare our property prices with other countries or even different periods in Australia and conclude that property prices are either over valued or undervalued, they are using the wrong statistics. 
We are currently being told that property prices when compared to our income levels make property prices unaffordable and therefore there will be a correction soon. 
We hear this especially from overseas commentators visiting Australian shores.
Harry Dent and Robert Kiyosaki are two such visitors to our shores recently who have said our property prices are overvalued when compared to our income levels. 
If you simply measured those two statistics against each other then one could arrive at that conclusion. 
However affordability is a function of house prices, income and interest rates. It's not simply between income and property prices. 
If you look at the graph below from BofA Merrill Lynch Global Research which compares: 
<ol>
<li>Implied price based on income growth  </li>
<li>Implied price based on income growth and interest rates </li>
</ol>
<img src="/images/2015/01/30/chan%20jan%2030%20one.png" alt="">
As you can see from the graph the red line is a lot below the blue line indicating that property prices are hugely overpriced. Most commentators use this line to run their argument that property prices as a ratio of income is in a bubble and a correction is imminent. 
If you look at the green line it is above the blue line which indicates that property prices as a ratio of income and interest rates are still affordable and not in a bubble. 
I think house price growth will slow in 2015 against a back drop of increasing unemployment figures amongst other indicators.
Ed Chan is founder and non executive chairman of <a href="https://www.chan-naylor.com.au/" target="_blank">Chan &amp; Naylor Accountants</a>.
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Australian housing is not overpriced - and here's why: Ed Chan

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GUEST OBSERVATION
Once again we have seen some commentators pushing for the abolition of negative gearing. 
The claim is that the government has lost some $13 billion dollars of revenue by allowing tax breaks through negative gearing to the 'so called rich'. 
As the government is trying to find savings to get the budget back in the black they have been criticized for asking the 'poor' to shoulder most of the budget cuts through GP co-payments, loss of family rebates, higher university fees, etc, etc, whilst so called 'rich' property investors are getting away with generous tax breaks through negative gearing. 
This is simply misrepresenting the facts.
Whilst taxpayers have claimed a total of $13 billion in losses in their tax returns, the actual revenue forgone by the government is calculated at their individual tax rates. 
Thus at an average tax rate of 35% the lost revenue is only $4.5 billion.
So the government has not lost $13 billion dollars by allowing negative gearing, but rather $4.5 billion.
Public housing provided by the government only accounts for around 4% of investment properties. The other 96% of housing is provided by the private investor.
Should they disincentivise property investment by removing negative gearing, we would see the government having to shoulder the weight of providing a much larger percentage of housing for tenants.
This would in effect cost the government much more than the $4.5 billion dollars a year in revenue forgone due to negative gearing.
In fact it would cost the government in the hundreds of billions to provide public housing.
You may recall that the Keating government attempted to remove negative gearing in the 80s but reversed their decision when the queues for public housing doubled.
Secondly there are around 1.6 million property investors in Australia and most of them are not so called 'rich'. 
In fact most property investors only own one property and fall into the category of middle class. They certainly are not considered 'rich'. 
In fact they should be applauded for the sacrifice to their lifestyle (due to the shortfall created by negative gearing) as they attempt to invest for their future and in so doing, reducing the government's burden in providing them an old age pension when they retire. 
In addition they save the government billions of dollars in not having to provide public housing for those unable to buy their own homes currently. 
Not to mention the knock on effect to the economy that property investors produce.
However negative gearing is only one piece of the jigsaw puzzle.
When it comes to the property market, many other factors such as jobs, interest rates, confidence, supply etc, have a far greater effect on the property market than negative gearing.
We need to have a growing economy which leads to increased revenues for the government as businesses do well and able to hire more people and with more jobs, our standard of living is improved. This will ensure the property market is stable and will continue to grow steadily.
Supply is a very important factor as successive governments have not provided the policies to generate more supply in past years. 
Ed Chan is non-executive chairman and founder of <a href="https://www.chan-naylor.com.au" target="_blank">Chan &amp; Naylor Property Accountants</a>.
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Negative gearing only one part of the property puzzle

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GUEST OBSERVATION
Now that is a dramatic headline and I left off 10 extra words: 'If you want to be rich and they are not'.
By the way that applies to all your friends also. 
If you want to be a great fisherman, then listen to someone who is a great fisherman.
If you want to be a great cook, then listen to someone who is a great cook.
If you want to be wealthy, than listen to someone who is wealthy.
I know that sounds like common sense but sense is not that common
What is even more important is the opposite to "listen to an expert" and that is "not to listen to a non-expert".
So before you decide whether to listen to someone or not, just look at their track record.
I know that's common sense, but how often have we been influenced by our friends and what their well-meaning advice has on us.
How many times have friends or family told us we were crazy to buy property when they don't have any themselves and really have no idea about it.
How many times have friends and family told us how to get rich when they themselves are not rich. We love and trust them so what they say tends to have more of an impact than the words of strangers.
However for example if your parents are not financially wealthy and you listen to them then you will end up exactly where they are.
If you listen to everyone instead of being selective about whom you listen to than you will get completely confused.
Ed Chan is a founding partner of <a href="https://www.chan-naylor.com.au/" target="_blank" rel="nofollow">Chan &amp; Naylor</a> accountants and a leading property tax specialist.
He has co-authored three best-selling books as a seasoned property investor who understands the relationship between property investment and tax.
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Love your parents, but don't listen to them

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Toby Johnstone wrote in the Sydney Morning Herald back in January 2014 that "investors' love affair with Sydney's property market could be over, with experts anticipating a slowdown in property speculation." 
"All the pointers are there showing that the Sydney investor market has overshot its fundamentals," the article quoted Andrew Wilson, the senior economist at Australian Property Monitors.
In the same piece, RP Data senior research analyst Cameron Kusher agreed, saying, "investors thinking of getting into the market had missed the boat. Whether you are chasing capital growth or rental return, neither look particularly strong at the moment certainly not as strong as 12 to 18 months ago. Given that, I do think that we will see a pullback in investor activity this year."
So what do you think? 
Recently I came across a graph (pictured below) that tracked both property growth over a long period of time but also identified yearly rates of change in property values. What's interesting about the graph below is that it shows where we are in the property cycle. 
 <img src="/images/stories/2014/03/14/chan%20march%2014%20one.png" alt="">
Source: Jon Giaan
The blue line shows property values but the orange line shows the actual change in property values year on year, and this is much more relevant in terms of determining when to get into the market and whether the market has run out of steam. 
You can see clearly that the market goes through many years with increasing annual growth rates and then reducing annual growth rates until finally several years of increasing negative annual growth rates before repeating itself. 
<blockquote>
There are several more years of increasing yearly growth rates before the yearly growth rates start to taper off. 
</blockquote>
The green line shows the current trend is upward in nature and, if history this will go on for a few years before the growth rate tapers off year on year until negative growth. 
You can see the positive yearly growth years are much more than the yearly negative growth years and that is why the blue line shows the property market trending upwards over the longer term. 
This also demonstrates that there are several more years of increasing yearly growth rates before the yearly growth rates start to taper off. 
In other words, if last year’s growth was 9.14%, and if the graph is right, we should get double digit growth rates this year and the next year an even higher rate. After that the yearly growth rates, whilst still positive, will be a lower rate year on year until it becomes negative. 
The reason for this is because of human nature. 
People are broken into four groups:
<ol>
<li>Early adopters</li>
<li>Middle adopters</li>
<li>Late adopters </li>
<li>Never adopters </li>
</ol>
The majority of people are middle to late adopters and they tend to create the momentum that is typical of property cycles. 
When the conditions first begin to change for property the early adopters get in first but the majority of people sit back waiting for more certainty and more people to invest. Hence the saying "the majority of people are like sheep".
In the meanwhile, if conditions change early adopters are also the first to get out (sometimes prematurely) but the middle adopters are still just getting in and this creates the momentum that shows up in the graphs as continuing forward momentum. 
This is than added to by the late adopters who are now just getting in, thus providing the "braking" effect to a plummeting of the annual growth rate. This gives the wave pattern we see in orange. 
If you believe the historic property cycle will repeat itself, then this graph demonstrates that the momentum has started to build, the middle adopters are still getting in the market and we are not as yet at the top of the yearly growth rate cycle.
Whilst there are no guarantees, the graph seems to indicate we are still on the upward path and we have not yet started to experience reducing growth rates which would normally run for several more years before we experience negative yearly growth rates. 
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Is it the time to get into property?

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The property market ebbs and flows over the middle to long term and different forces come into play to cause this.
For example economic growth with low unemployment, low interest rates create the demand for housing which attracts developers to build to meet this demand.
Eventually demand is met and the market reaches saturation as developers may have built too many properties and this causes developers to cease building until the oversupply dries up and demand is there again.  
This may take many years before the tide turns again however it creates the ebbs and flows that are associated with prices moving up and down.  
That was a very simplistic over view of the market. There are many complex dynamics that affects the market as well, the overseas confidence and the Australian dollar.  
One particular area that has not had much coverage but could be a great indicator of the potential movement of property prices is the difference between yields and property prices.  
As demand from investors make up a significant part of property price movements and investors are focussed on returns on investments such as rent yields, we should look at the correlation between rent yields and capital value.  
Let’s see how rental yields dictate where we are in the property cycle 
As rents increase it attracts investors into the property market, especially since the return from fixed interest instruments such as term deposits and other cash investments are considerably low at the moment.  
There is much talk from many economists about the end of the mining boom and predictions of a slowing economy due to China’s slowdown and running into potential head winds with unemployment growing to over 6.5% and economic growth slowing to below 2% per annum over the next five years causing a possible recession on the horizon.  
Whenever economists predict the worst, share investors react first, by cashing in their stocks for safer investments but cash returns are so low that property is the next best group to invest in. So as people hop out of the share market and into the property market, it generates demand for property.  
The other group that drives property prices are owner occupiers.  
Since interest rates on home loans are at its lowest, many people who are renting find it cheaper to purchase, causing a second group of people who drive demand in property.  
The last group that drives property is the supply line. Developers have not been building, where by there is also a shortage of properties.  
Our net immigration of around 250,000 into Australia also drives demand for property.  
Most rental yields are now over 4.2% to 5.2%. Interest rates on home loans are as cheap as 4.85% fixed for three years.  
Research from last month’s RP Data shows, rents have outpaced growth in values since the GFC and created a gap which indicates the conditions are there for the property market to move upwards.  
According to RP Data since the end of 2007, house prices have grown 13.4%percent. For five and a half years, combined capital house prices have been below inflation.  
However over the same period rents have grown 32.1%, almost twice the rate of house prices.  
Refer graph below:
 <img alt="chan_sept_24_chart_one" height="189" width="470" src="/images/stories/2013/09/24/chan_sept_24_chart_one.png">You can see the gap is largest right now which means yields are increasing.  
When yields are so high (namely it’s very expensive to rent) it opens the door for people to buy.  
When people start buying (owner occupiers) it pushes prices up faster than rental increases, thus reducing yields down to normal levels.  
As you know, to calculate yield, one must divide the yearly rent by the value of the property, e.g. rents per week of $500 is $26,000 for the year, divided by the value of the property $450,000 gives a rental yield of 5.78%.
So if property values drop, the yield would increase and should property values increase, the yields would drop, without the rental moving at all.  
The last property boom started when yields were around 6% to 7% and as the property market boomed and the values increased, the yields dropped to around 4% per annum making it more difficult to buy into the property market.
When the yields eventually drop to around 3% due to property growth it will hit a ceiling where the market will no longer tolerate and people will go back to renting and put pressure on rents to rise to a level where it becomes cheaper to buy again and thus the cycle repeats itself.  
Let’s look at city by city  
In Sydney, home values have increased by around 20% since the end of 2007, while rents have increased 35%. The gap between rental and value indicates potential for capital growth.
 <img alt="chan_sept_24_chart_two" height="206" width="470" src="/images/stories/2013/09/24/chan_sept_24_chart_two.png">In Melbourne both rents and capital growth have increased around 20%. This indicates that there is still a way to go before Melbourne is in a position for capital growth.
 <img alt="chan_sept_24_chart_three" height="220" width="470" src="/images/stories/2013/09/24/chan_sept_24_chart_three.png">In Brisbane, house prices have fallen by 3%, and rents have grown 27%. The huge gap between values and rental growth say’s that the high rentals will drag up the values so Brisbane shows a lot of potential.
 <img alt="chan_sept_24_chart_four" height="206" width="470" src="/images/stories/2013/09/24/chan_sept_24_chart_four.png">In Adelaide as well, house prices have grown just 7%, while rents have increased 21% and shows great potential
 <img alt="chan_sept_24_chart_five" height="227" width="470" src="/images/stories/2013/09/24/chan_sept_24_chart_five.png">In Perth, the gap is quite large where home values have only grown 2% since the end of 2007. Rents on the other hand have increased 48%. Perth appears to have the greatest potential for capital growth.
 <img alt="chan_sept_24_chart_six" height="205" width="470" src="/images/stories/2013/09/24/chan_sept_24_chart_six.png">Please be aware that there are many indicators that drive property prices and this analysis is based only on one indicator, but a useful indicator.
 
<hr>
Ed Chan is a founding partner of <a rel="nofollow" target="_blank" href="https://www.chan-naylor.com.au/">Chan &amp; Naylor</a> accountants and a leading property tax specialist.
He has co-authored three best-selling books as a seasoned property investor who understands the relationship between property investment and tax.
 
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Rental yields, where do they indicate we are in the cycle and where should you buy? Ed Chan

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Everybody is aware that property values move up and down in cycles.
The strategies used vary for different stages of the property cycle should move with them.
Growth Stage 
 
In a growth stage it's always best to go interest only with your loans as the repayments are less, leaving you with extra cash flow to fund another property. Two properties growing will make you more money than one property growing.
Decline Stage 
 
However the strategy is completely different if the property is in a decline stage. This stage is usually accompanied by a recession.
In a recessionary state there is pressure on interest rates to drop in order to stimulate the economy.
At this point the strategy should be to pay down your debts with lower interest payments you will be able to pay off your principle faster.
In a recessionary state most assets are not growing so the capital gain could either be negligible or even have declined.
Hence, if you pay off your debts in this period you will save paying interest. If you are saving on paying interest that’s the equivalent of earning it.
For example if your interest rate was 6.15% than by paying off the principle and not having to pay 6.15% interest you are actually earning 6.15%.
It's very unlikely in a down market you could earn 6.15% on your money. So the best return on your investment in this period is to pay down your principle.
Additionally in a down cycle your property values are also declining in the short term.
Lower interest rates allow you to pay off more of the debt so that when the property market recovers again you will have a lower debt level or greater equity. Therefore you have manufactured some equity if you like in a down market.
As the property market recovers so will interest rates go up but hopefully by then you would have paid off sufficient debt that it will be positively geared in addition to the equity being greater.
So the moral of the story is make sure you roll with the circumstances and adapt your property investment strategies to the market conditions and take advantage of them as they present themselves.

<hr>
Ed Chan is a founding partner of <a rel="nofollow" target="_blank" href="https://www.chan-naylor.com.au/">Chan &amp; Naylor</a> accountants and a leading property tax specialist.
He has co-authored three best-selling books as a seasoned property investor who understands the relationship between property investment and tax.
 
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Ed Chan

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