Long-term investing in property funds by superannuation fund members will bring better returns by using the tax deferred component built into the funds, according to APN Funds Management head of retail Mike Doble.
Doble said distributions from a property fund are not taxable when they are received, as the tax is deferred until disposal of the units.
“Income earned by a property fund and any capital gains are distributed to investors without being taxed in the property trust,” he said.
“Tax is levied at the investor level rather than at the entity level, at the investor’s own marginal tax rate, creating an equitable and efficient means for distributing income.”
But if the investment were held in a superannuation fund then the distributions would avoid paying income tax or capital gains tax when they commence a pension.
Doble said with the changes to the superannuation legislation on July 1, this year, an investor holding a property investment in a fund could wipe out any tax liability.
For investors born before July 1, 1960, the preservation age is 55, and for those born after June 30, 1964, the age rises to 60.
“This means people with a property fund investment will have to hold onto them until the preservation age is reached and they commence a pension,” he said.
“The benefit is the investor can sell the units in the property fund after commencing a pension, as the tax deferred income will become tax free.”
For some investors, however, this will mean they will have to hold their property fund investments for a much longer period than traditional managed fund investing.
As people get older they begin looking for lower risk investments that deliver higher income returns, Doble said.
“Our Property for Income Fund has that strategy of low risk and high income, so it is attractive to people moving towards retirement age,” he said.
“And some people rate risk highly, so they are looking to move to a low risk environment for their investments, which some property funds can deliver.”
In the Property for Income Fund product disclosure statement, the recommended investment timeframe is five to seven years, but Doble sees no reason to change that.
“I think we will see people in superannuation funds switch to a longer timeframe horizon,” he said.
“The tax regime is encouraging us to be thinking about long-term investing, and it makes profound sense to use investments, such as unlisted trusts, that will deliver tax deferred incomes.”
