Projections of a flood of people selling out of direct property to make a $1 million one-off tax-advantaged cash contribution to super by June 30 this year, do not appear to have materialised.
Various fund and investment managers canvassed by Money Management last week suggested that relatively few of their clients have in fact done so to date, or are likely to do so by the deadline.
They suggest that while many clients, particularly those closer to retirement age, have expressed an interest in availing themselves of the Federal Government’s key Simpler Super provision, few have actually proceeded with it.
Their assessment appears to be supported by key findings of a Mercer Wealth Solutions study on the simpler super rules conducted between March 14 and 19 this year, and released last week.
It found that only about 20 per cent of the random survey’s 300 working respondents aged 50 and over were ‘likely’ to deposit extra funds into their super before June 30 this year.
Of this 20 per cent, one in seven respondents (14 per cent) said they would liquidate property assets, while 17 per cent would liquidate shares, and 41 per cent would use savings from a cash management account or term deposit.
Dugald Higgins, associate director of Property InvestmentResearch, believes there are “very few people invested in direct property through managed investment schemes who would have redeemed their investment”.
Higgins said he could not comment for direct property outside of managed investment schemes (MISs), but the “very narrow levels of liquidity of direct property funds in general would prevent large scale redemptions by investors”.
“A maximum of 5 per cent of the total size of the $22 billion direct property funds industry are redeemed each year, and, in fact, I would say this is closer to 2 per cent.
“There may be some investors who are fortunate to have a fund winding up at an opportune time, allowing them to make redemptions, but this would still represent very few clients of MISs.”
Standard & Poor’s associate director Robert Buckmaster believes the “volume of redemptions across direct property managed funds has been minuscule in general over the past 12 months”.
“It has been consistent with a death in the family, or perhaps a change in financial circumstances, but not with a [general client] change in asset allocation.
“Most investors appear to be comfortable with their asset allocations to date … notwithstanding that direct property funds have only limited liquidity or redemptions facilities.”
He added that the “indicator of a sell-down or a shift in asset allocation out of directly-owned assets outside managed property funds, such as investment housing, would be a softening of yields — and we certainly haven’t seen that”.
“It’s true that residential property hasn’t been as strong as it has been recently, but yields are holding up.”
Commonwealth FinancialPlanning general manager Tim Gunning said some clients had sold property to contribute to super, but “I wouldn’t suggest this is rampant among the strategies our clients are using”.
While many clients approaching or over the age of 60 do want to take advantage of the Simpler Super provisions, he said, they are baulking at the reality of having to divest themselves of their property.
“Essentially, they need to weigh up the tax consequences of getting out of, say, their residential property against the benefits of having money in a tax-free environment.”
He said the “fundamental issue is that assets that sit outside of super, including direct property, are subject to capital gains tax (CGT), and, in addition, the rental income is also subject to tax at marginal tax rates”.
“As the law stands, investors are unable to take these assets that they hold outside of super and actually transfer it into their super — not even within a SMSF [self-managed super fund].
“This means clients are required to make the decision to divest themselves of assets, such as residential property, and thereafter make cash contributions to their super.
“There are tax implications involved in doing this, particularly in terms of realising a CGT liability, and it may be that clients are not prepared to acquire this liability.”
Gunning said there appeared to be a greater willingness by clients with equity in investment properties, in particular, to borrow against this equity to contribute to super — with a view that over time they will sell the property and pay off the debt.
“That de-risks the strategy to some extent, although the strategy is going to suit people who are going to be able to access their super immediately or in the near future.
“You would still have to make repayments on the borrowing of the equity, which requires one to be careful about managing their cash flow and making sure they can service that debt.”
Citibank head of investing and retail banking Andrew De Vries said the bank had not experienced a surge in clients selling directly-owned property to contribute into super.
“There have been a lot of clients who have expressed interest in the idea, but in a lot of cases they have opted not to proceed after a careful consideration of the wider implications,” De Vries said.
“They seem less inclined to proceed when you tell them there will be CGT and other transactions costs, and that there is a considerable timeframe to receive the funds from the sale of a property.”
Of those Citibank clients who have sold property for super, according to De Vries, most are close to retirement anyway and have some investment property as a means for providing for their retirement.
“They are really just bringing forward something they would have done anyway — rather than this legislative opportunity creating a large scale shift in asset allocation.”
He added that in a lot of cases people who are invested in direct property have a particular bias towards the asset class, and could feasibly be reluctant to move out of the asset class.
“If they are going to sell direct property to put the money into super, then there is a high chance they will be investing in financial securities within super, as opposed to direct property.”
Some clients may have also decided to wait until after June 30 to take advantage of the transitional averaging contribution rules, also announced in last year’s Budget, according to De Vries.
These rules allow people to make undeducted contributions of $150,000 before June 30 this year, and then a further maximum $450,000 averaged over three years, or $150,000 each year for three years.
He suggested that Citibank clients who have contributed $1 million would have done so months ago and would be characterised by a very strong relationship with a financial planner”.
Their planners would have been particularly active early on in pointing out the longer-term benefits, particularly in terms of drawing an income, of putting their assets into a tax-advantaged environment.
This would have helped people weigh up the pros and cons, such as transactions costs and the timeframe involved in selling direct property, in order to to make an informed decision, De Vries said.
