CHAPTER 8
Investing in Property and Collectibles
OVERVIEW
• Tangible investments like property are
attractive to many investors
• The attraction increases in bad times when
faith is lost in financial assets
• Nevertheless, there are advantages and
disadvantages to property investment
• Careful evaluation is needed before investing
• Gold, art and collectibles can also all act as
medium- to long-term investments
Advantages of property investment
• Tax deductions are available for interest
payments on loans and various property
related expenses
• Property provides an income stream
and capital gains
• Property can act to diversify and
stabilise a portfolio
• Residential property has historically
been a stable asset class
• Investment property can be a stepping
stone to home ownership
• Being tangible, you can see what you’re
investing in
Disadvantages of property investment
• Property is heavily taxed; capital gains
taxes, land tax, stamp duty, GST
• Transaction costs are high; legal fees,
agents fees, conveyancing costs
• Medium to long term may be required
to achieve a net capital gain
• Commercial property involves
complexity; zoning, planning, leasing
• Property is illiquid
• Expertise and research is required
• Maintenance and management may be
expensive and difficult
Issues of Supply and Demand
• The market for homes is subject to the
same supply and demand pressures as
any other market
• However, the social and psychological
issues involved in the housing market
make it especially important
• When we think of the property market
we think of homes, units, rental
investments, etc, but the real property
market is the market for land, which is a
limited commodity
Residential Property
Factors that may affect the demand for
residential property include:
• immigration levels
• inflation
• deferring of 1st home purchase
• interest rates (as interest rates increase,
rent increases as people less able to
service mortgage commitments)
• changes to various state and federal
taxes and duties
Commercial Property
Includes industrial sites, offices, retail, and
hotel or motel accommodation.
Commercial property has traditionally
been treated as a defensive asset class
and yet has historically outperformed
residential property.
Commercial property requires
significant expertise to deal with matters
such as owning, planning and leases.
Methods of property investment
• Directly through a real estate agent by
negotiated sale auction
• Through listed or unlisted property
trusts
• Through a property syndicate
Housing Affordability
• State & federal taxes
• Stamp duty — purchase duty &
mortgage duty
• GST (newly built homes)
• Financial resources available
• Household saving capacity
• Repayment capacity
Property taxes
State taxes
• Stamp duty; between $15,000 and
$23,000 for a $460,000 purchase
• Land tax; between 1% and 3.6% on
values above thresholds from $360,000$2,299,000 (excluding the home).
Federal taxes
• GST; payable on commercial and new
residential properties and sales
commissions, but not on existing
residential properties or on residential
rental payments
• CGT; exemption for the main residence
and special rules for deceased estates
Stamp Duty
Stamp duty is a state tax levied on
purchase of property, including main
residence. It is charged on both the
purchase and mortgage value in most
states.
Stamp Duty
• The table below shows the different
amounts of stamp duty payable (purchase
duty only) on the purchase of a $460,000
home in 2010 by state:
Victoria
22,670
South Australia
19,330
New South Wales
16,190
Queensland
14,525
Tasmania
15,950
Western Australia
15,865
Northern Territory
18,305
ACT
18,300
Land Tax
• 31st December 2004 saw the scrapping
of the land tax free threshold of $317,000
in NSW. An API survey found the tax was
adversely affecting 93% of buyers and 79%
of developers to buy in NSW (Sunday
Telegraph May 1, 2005).
• The land tax free threshold in NSW in
2010 is $376,000 and the tax rate is 1.6%.
• A 2% surcharge applies on values above
$2,299,000.
GST
• The purchase of new residential
property and commercial premises is
subject to 10% GST. No GST is charged on
land or on the sale of existing residential
property.
• GST also applies to commissions from
the sale of property and rental
commissions but no GST is charged on the
rent paid by a tenant for residential
purposes.
Capital Gains Tax
Capital gains tax (CGT) applies to assets
purchased after 20/9/1985, with 50% of
the gain on property included as
assessable income. CGT is covered in
more detail in other chapters of the text
but can be summarised as follows:
• Main residence exemption (not
available where owned by company or
trust).
• Charged on land adjacent to family
home if sold separately.
Capital Gains Tax
• Charged on family home if person
ceases to be Australian resident.
• Charged on sale of investment property.
• No CGT on deceased estates if
continued to be used as main residence
by successive generations or if disposed
less than 2 years after deceased died.
After this, the cost base is equal to market
value at date of death of deceased if
purchased prior to September 1985 or if
main residence. Otherwise date of
purchase used.
CGT & Home office
• It is important also to consider if a main
residence is being used as a place of
business, as the CGT exemption is reduced
accordingly.
• The ATO have made a distinction
between a ‘place of business’ (eg doctor
has consulting rooms attached to main
residence) and a ‘place of convenience’
(eg teacher prepares lessons and marks at
home).
CGT & Home office
• Deductibility for running costs
(electricity, depreciation of office
furnishings, computer depreciation,
telephone) is allowable in both situations
but deduction for occupancy costs (rent,
mortgage, interest, insurance) is only
allowed for a place of business. Also, the
home owner must consider the additional
cost of CGT that may be payable on the
business portion of the sale of their main
residence in the future.
City v Country
• While housing booms usually affect prime
suburbs around capital cities the most, even
in many rural centres there have been
unprecedented price increases over recent
years.
• In some part, this reflects increased
demand as more people wish to get out of
the city.
• Many people make the decision to move
away from cities based on personal, rather
than financial criteria. While they consider
the lifestyle change positive, they may find
that their new environment does not
actually fit their social and personal needs.
Property investment analysis
When purchasing a property for
investment purposes, it is important to
ensure sufficient research has been
conducted. The following points should be
considered:
1. The investor’s objectives — risk,
return and term.
2. The location — residential (close to
schools, transport, shops) or
commercial.
3. The property market — vacancy rates,
type of tenant, recent selling prices
and rental income of similar
properties in the area.
Property investment analysis
4. The condition of the property — does a
building inspection reveal any costly
repairs or maintenance requirements?
Does the property conform to council
regulations? Does the age of the property
suggest any costly renovations will be
required? Does the pest inspection reveal a
problem with termites or other pests that
might be costly to remove?
5. Income generation — rental income, lease
term, vacancy rate.
6. Capital appreciation and applicable time
frame.
7. Costs — transfer costs, operating costs,
property management costs, loan
payments.
8. Cash flow analysis — pre and post tax.
Property investment analysis
9. The investor’s objectives — risk, return
and term.
10. The location — residential (close to
schools, transport, shops) or
commercial.
11. The property market — vacancy rates,
type of tenant, recent selling prices
and rental income of similar
properties in the area.
Investing in Gold
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Aesthetic value and intrinsic worth
History as coinage and store of value
Underpinned currency for most of the
twentieth century
Renewed popularity post GFC
Advantages of investing in gold
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More liquid than other tangible
investments
A useful diversification instrument
Increases in value at times of low
interest rates
Can hedge against inflation
Demand for gold often increases in
times of economic and political
instability
Drawbacks of investing in gold
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Insurance costs
Storage and handling security and
costs
No income stream (other than if
invested in ETFs)
Possible fraudulent activity
Possible capital gains tax implications
Ways to Invest in Gold
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Buy physical gold
Buy gold mining stocks
Buy gold ETFs
Buy gold based derivatives
Investing in Art
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Take pleasure from the investment
Useful diversification
$1,000 upwards minimum investment
High returns but also
underperformance and losses are
possible
Advantages of Investing in Art
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Store of value for use as a medium- to
long-term buy and hold investment
strategy;
Alternative investment class which moves
counter cyclical to other major
commodities;
Opportunity for portfolio diversification;
Inflation hedge in periods of high inflation
Ease of entry to the market
Investment from $1000
Potentially significant capital appreciation
Possibility of receiving rental/lease
income from galleries, businesses or
restaurants
Aesthetic appeal
Drawbacks of Investing in Art
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Relatively illiquid
Not usually divisible
Need to keep adequately insured
Risk of buying a ‘fake’, or of
reattribution
Strict rules for self-managed
superannuation funds (SMSFs)
Capital gains tax (CGT) implications
for items acquired for more than
$500
Transport, storage and restoration
risks and costs
Very high transaction costs
Considerations when Investing in Art
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Investment strategy — capital
appreciation, income
Investment term
Genre, school or style
Budget
Expertise and research
Method of purchasing
Record keeping
Investing in Other Collectibles
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Any items that appeal to collectors that
might be expected to increase in value
over time
May include antiques; jewellery; coins;
bank notes; rare folios, manuscripts or
books; postage stamps; collectors’ motor
cars, motorbikes and boats; posters,
comic books, toys, sporting memorabilia,
movie memorabilia, musical instruments
Detailed knowledge of the market is
required
Collectables are relatively illiquid; there
are high costs in storage, insurance,
transaction costs and capital gains tax.
They may provide a hedge against
inflation
Summary
• Tangible investments like property are
attractive to many investors
• The attraction increases in bad times
when faith is lost in financial assets
• Nevertheless, there are advantages and
disadvantages to property investment
• Careful evaluation is needed before
investing
• Gold, art and collectibles can also all act
as medium- to long-term investments