This is always a hot topic of debate however the answer is very simple, you should have both.
It has been an eternal debate as to which investment is the better, and despite what many people think the long term return on shares and property is very similar. There are some key tax issues to note in making a decision on which one you choose to make.
When living outside of Australia, there is no Capital Gains Tax on share sale profits nor is there any Income Tax on dividends received each year. Shares enjoy a tax free status for Non-Resident Taxpayers which makes them an extremely attractive option for investment for many expatriates and foreign investors in Australia. You should note that you may have tax issues in the country you are living in so best to check that as well, however many expatriate zones allow tax free status on international shares.
Tax free is a major positive but it is not the only one. Other plus points include:
- Shares are easy to accumulate as they can be bought in parcels from A$500 upwards,
- It is also easy to sell shares that are listed on a Stock Exchange, with sale proceeds usually available within 3 days,
- In many cases they can offer very attractive dividend yields. At the current time this can be well above the interest rates on offer for bank deposits.
Nothing is perfect though and shares do have some negative issues including:
- The market risk of shares which we have seen to be very volatile in recent past,
- It can at times be very confusing as to what shares to buy as there are many options,
- There is some level of management and effort required to monitor and adjust from time to time.
Nonetheless, shares can be a sensible part of any investment portfolio and well worthy of consideration.
Property has very different characteristics to shares.
Australian property will always be a taxable activity regardless of where the owner lives in the world, but is can be a very Tax Effective investment.
This is because the Australian Government allows all expenses on the property to be offset before any tax is levied on items such as interest on loans, maintenance, travel, agent fees and insurance. In addition there are special write offs on the construction costs and internal fittings of a property that can ensure that no annual income tax is payable.
Capital Gains Tax is payable as well, however it can also be effectively managed through the accumulation of annual tax losses and multiple property ownership. For more detail on these issues please visit our website.
Being tax effective is an advantage, but property has remained popular for other reasons including:
- By nature “bricks and mortar” have been considered to be a safer investment class than other investment forms. This is especially true for Australian property which has shown long term modest and sensible increases with few negative growth periods,
- Banks are happy to lend 80% of a property value which can make the entry cost into property a lot easier, while at the same time improving your tax position and enhancing the overall return through the mathematical benefits of sensible leveraging,
- At the end of the day, we all need somewhere to live, so acquiring property is very much an inevitable reality for all of us. As it turns out, the earlier we buy, usually the more affordable the property is,
- While living overseas, the ability to rent the property out during your absence makes it very affordable to hold a property. The net ownership (rent minus expenses and interest) cost can be less than 1%pa of the purchase price which means a A$1 million property costs less than A$1,000 to own. As long as the property appreciates more than this, then you are better off and for the more desirable areas the growth has consistently outpaced this holding cost making the decision to buy a smart one.
From the negative aspect, some of the things to consider include:
- The initial entry price can be both scary and significant. The first property you buy will usually need a 20% deposit plus up to 5% for purchase costs, which means you will need to commit a fair sum to enter the market.
- Property by nature is a long term investment and this is especially true for Australian property as the safe market results in modest growth that in turn needs as long as possible to perform to its peak. You should resist taking speculative positions in Australian property as you may be disappointed,
- If you are seeking quick exist from property markets you may be disappointed, as it can take between 2-8 months from decision to sell until you receive the proceeds,
- There are risks of being a landlord in all property markets. Australia has excellent legals protections for owners and is considered a very safe rental market, but that doesn’t mean no risk or hassle in some cases.
The decision as to which investment choice is best for you usually starts with how much you have to invest.
If you want to buy a property you need a substantial deposit (25% or equity in another property), so if you are still short of that you will have to wait on the sidelines.
As such, we usually suggest that you can consider accumulating your regular savings in shares along the way the, when you see the right property for you in your budget range, cash in your shares and grab the property, then start the share accumulation all over again for your next property.
Regardless of which option you choose, you will have a tax advantaged investment option from an Australian perspective and hopefully building wealth along the way to improve your financial future.
