Superannuation vs property: choosing the right vehicle for tax efficiency in retirement

For Australian investors, superannuation and property are two of the most common long-term wealth-building strategies. Both offer important tax advantages but they function very differently when it comes to retirement income, flexibility and estate planning.

The strategy you choose can significantly impact how much is kept after tax and how effectively you can pass on wealth to the next generation.

This guide compares the pros and cons of each and explores why combining both may deliver the best result for many investors.

Superannuation – the tax-effective retirement income stream

Superannuation is designed to support Australians in retirement through tax advantages and income certainty. Contributions are generally taxed at 15 per cent and earnings within the fund are taxed at the same rate while in the accumulation phase.

Once you transition into pension phase and are over age 60, both withdrawals and investment earnings are usually tax free.

Pros:

• contributions and earnings are taxed at low rates
• income from super is tax free after age 60 if in pension phase
• structured for long-term financial stability
• easily diversified and low maintenance.

Cons:

• contribution caps limit how much can be added each year
• funds are preserved until a condition of release is met
• returns depend on market performance
• superannuation works particularly well when you want simple, tax-free income with minimal administrative effort in retirement.

Property – tangible, leverageable but tax sensitive

Investment property remains popular due to its growth potential, tangible nature and ability to be geared, even in retirement. However, its role in retirement requires a more active management approach and careful consideration of tax outcomes.

Pros:

• rental income provides ongoing cash flow
• ability to use leverage to accelerate growth
• deductible expenses reduce taxable income
• long-term asset for legacy or intergenerational planning.

Cons:

• rental income is fully taxable at your marginal rate
• no capital gains tax (CGT) discount available for non-residents
• land tax, strata and foreign ownership surcharges may apply
• illiquid and expensive to sell
• net yield is often much lower than gross yield.

Let’s break this last point down.

Gross vs net yield – a hidden property cost

A $1 million residential investment property may produce a 4 per cent gross yield, or $40,000 per year in rent. However, once you deduct property management fees, council rates, land tax, insurance, maintenance and other holding costs, your net rental income is often closer to 2.5 per cent, or $25,000 to $28,000 per year.

This entire amount is fully taxable. Depending on your other income, you may be left with $20,000 to $24,000 after tax.

In contrast, if the same $1 million were held inside a superannuation pension account, and you received a 5 per cent return, you could draw $50,000 per year completely tax free if over age 60 and in retirement phase. You would also have no maintenance costs or vacancy risk.

The gap between gross yield and real after-tax income is a crucial factor that property investors underestimate in retirement.

Strategy – phasing out of rental income in retirement

For those entering retirement with multiple investment properties, a strategy to consider is to gradually phase out of direct property ownership and into higher net-yielding, lower maintenance assets such as superannuation or diversified investment portfolios.

By selling one property at a time over different financial years, sometimes a few years apart, you can manage CGT and avoid spiking your taxable income.

The proceeds from each sale can then be contributed to superannuation using concessional or non-concessional contribution caps, depending on eligibility and age limits as well as unused carry forward concessional contributions.

This phased out approach helps you:

• reduce reliance on taxable rental income
• improve overall income efficiency through tax-free super withdrawals once in pension mode
• simplify your financial life by avoiding landlord issues in retirement
• boost and preserve super for later while utilising some sale proceeds for annual living expenses first
• and, it allows for a transition from actively managed assets to passive, tax-effective income while still controlling the timing and impact of each financial move.

Estate planning and CGT implications

Australia has no inheritance tax but investment assets passed to beneficiaries are not tax free. Beneficiaries also inherit the CGT liability when they later sell the asset.

It is important to distinguish between pre-CGT and post-CGT assets:

• Pre-CGT assets are those purchased before 20 September 1985. These are exempt from CGT while held but lose that exemption once inherited. The cost base resets to the market value at the date of death.
• Post-CGT assets are those acquired after 20 September 1985. Beneficiaries inherit the deceased’s original cost base and are liable for CGT on the full gain from that point.

Example:
For simplicity, imagine two properties, both worth $1 million at the date of death. Each was originally purchased for $200,000 and both are passed on to separate children in a will.

Property A (pre-CGT): Purchased in July 1984. The beneficiary receives a new cost base of $1 million. If they later sell the property for $1.2 million, CGT applies only to the $200,000 gain.

Property B (post-CGT): Purchased in July 1995. The beneficiary inherits the original cost base of $200,000. If they sell for $1.2 million, CGT applies to the full $1 million gain.

The same value, same capital growth, and same market conditions, yet the tax outcome is vastly different. Estate planning must take this into account to avoid unexpected tax liabilities for your family.

What strategy works best?

There is no universal answer but here are some general principles:

• For tax-free income and simplicity:
  Superannuation is ideal for those wanting a hands-off, tax-free income source with stable cash flow.
• For control and growth potential:
  Property can provide long-term capital growth and personal control but comes with complexity, ongoing costs and taxable income.
• For flexibility and legacy planning:
  Combining both allows you to manage timing, draw from the most tax-effective source at each life stage and structure your estate for intergenerational wealth transfer.

The structure that works best for you

Superannuation and property each play an important role in wealth creation and retirement income.

The key is understanding the timing, tax treatment and strategic interaction between them. A well-structured plan that transitions property wealth into super, manages CGT exposure and preserves flexibility in retirement can deliver the best of both worlds.

Speak to a tax advisor or financial planner who understands your long-term goals, the impact of CGT on residency status changes on property assets and the family structure.

With the right approach, you can reduce your tax liability, simplify income streams and leave a stronger legacy.