Tax Differences: Property vs Shares
Recently, I stumbled across some figures on the historical returns from Australian shares and Australian residential property (Michael Yardley’s Guide to Investing Successfully, page 220). The numbers suggest that the returns on Australian residential property (7.4%) are better than those for Australian shares (5.5%) over the 10 year period to December 2015. Over the 25 year period to December 2015, both return somewhere in the region of 10%.
This prompted me to think about the relative pros and cons of property and share investment in terms of tax. The figures previously presented are of course figures based on pre-tax returns.
Interestingly, the tax arrangements in relation to shares appear
s to be much more attractive than that applicable to property. In particular, assuming that there is no underlying property held by the referable company, there is no stamp duty or land tax payable on the purchase of shares in a public listed company; franking of dividends applies to shares by not to property; and deductions for interest are unaffected by negative gearing restrictions as proposed by the Federal Labor Party. On the other hand, more generous deductions apply in relation to property, although even these are being wound back by the current Federal Government.
The table below summarises the contrast:
|
|
Shares |
Property |
|
No |
Yes |
|
No |
Yes |
|
Yes, but ALP proposes to restrict this benefit |
No |
|
Yes |
Yes |
|
Yes, currently 50% but ALP proposes to reduce to 25% |
Yes, currently 50% but ALP proposes to reduce to 25% |
|
Yes |
Yes, but ALP proposes negative gearing restrictions |
|
Very few |
More generous, but the Coalition has restricted certain deductions e.g. travel expenses to view property/certain depreciation deductions. |
To see how some of this plays out in a case study, I hypothesize the case of Betty who inherits $1,000,000 in 2012. She could have used the money to buy, in her own name:
- a) A property being a small office block in Broken Hill, NSW, which produces an annual 5% taxable return; or
- b) A selection of listed company shares each paying a 5% fully franked dividend.
The returns, based on various assumptions as indicated from these two different investments is summarised below:
|
|
Property $ |
Shares $ |
|
Purchase for |
(1,000,000) |
(1,000,000) |
|
Stamp duty |
(40,490) |
Nil [1] |
|
Taxable income over 5 years |
250,000 |
250,000 |
|
Tax to pay @ assumed marginal rate of 32.5% [2] |
(65,747) (ie each year tax is payable on 50,000 – 9540 (land tax) @ 32.5%) |
(6,250) (ie each year tax is payable being 16,250 – 15,000 franking credit) |
|
Land Tax over 5 years [3] |
(47,700) |
Nil 3 |
|
Sell at end of Year 5 |
1,300,000 |
1,300,000 |
|
CGT |
(42,170) (ie SD is part of the cost base so CG included is half of 259,510 |
(48,750) |
|
Net Return over 5 years |
353,892 |
495,000 |
As can be seen, the overall return from the share investment is some 40% greater than what is returned from the property investment.
Of course, there are a number of flaws to the analysis:
- the 2 investments won’t increase at the same rate and the returns won’t be the same;
- the greater availability of deductions in relation to the property investment, have not been fully reflected in this analysis and the tax payable on the property investment will be less, having regard to the greater number of deductions which will be available in the context of the property investment; and
- the income tax stamp duty and land tax rates are likely to change over time.
Nonetheless, even recognising all these deficiencies, the general point is true – from a tax perspective, there is a clear bias in favour of shares over property. Stamp duty, land tax, and franking of dividends, provides the greatest advantages to shares over property. The significant upfront impost of Stamp Duty inevitably means that the amount invested initially is significantly reduced when investing in property as opposed to shares.
Mr Shorten’s proposal to deny excess franking credit refunds is likely to diminish the attractiveness of share investment, (at the very least temporarily) but this is likely to be matched or surpassed by the diminished interest in property that will be caused by his proposal to curb negative gearing on all but new investments in property.
Article written by The Tax Institute
