Super advantages to LPTs

Listed property trusts (LPTs) are offering long-term tax advantages for superannuation fund investors, a Melbourne property manager claims.

The key is the tax deferred income component of the trusts, which will eventually become tax-free on the member’s retirement, APN deputy chief investment officer Michael Doble said.

The recent correction in Australian LPTs has increased initial yields for new investors and benefited investors who participate in funds with a high ‘tax deferred income’ component, Doble said.

“Tax deferred income is calculated as a percentage of income earnings, so when income increases, your tax deferred component increases,” he said.

“This has significant long-term advantages for investors.”

Tax deferred income derives from depreciation and building allowances on the direct property assets in a fund.

As property funds tend to buy newer commercial buildings, the depreciation benefits are greater than an individual buying a residential investment property.

“The level of tax deferred income available varies and is greater from managers who invest in newer buildings,” Doble said.

According to APN, if a property fund paid a distribution of $1,000, and 60 per cent of the payment was tax-deferred, the taxable income would only be $400.

The fund manager’s APN Direct Property Fund had a tax deferred component of 64.90 per cent for 2007 returns and 100 per cent for the previous financial year.

“The great advantage of tax deferred income is that the investor is deferring their tax liability,” he said.

“They can use that money or re-invest the proceeds and therefore potentially enhance the overall returns.”

Normally, capital gains tax is paid on the tax deferred component of the investment in the fund when it is sold, but Doble said once the investor reaches preservation age and commences a pension, they no longer pay tax.

“Therefore, selling the securities after commencing a pension might mean that tax deferred income received prior to the pension will never have tax paid on it,” he said.

“With the new superannuation tax regime, it now makes profound sense to target managers who maximise tax deferred income by investing in newer building stock.”