Super Top Three Questions

Readers’ emails are a good indication of what worries people most. The dominant theme for 2010 is impending change. In nine months we have seen the release of the Ripoll report into financial planning, the Henry tax review and the Cooper review into superannuation.

Add to this a sharemarket that started with a bang but soon lost impetus, tighter lending to some businesses and a housing market that is one of the most expensive in the world. Charles Darwin came up with the answer years ago: ”It is not the strongest of the species that survives, nor the most intelligent that survives – it is the one that is the most adaptable to change.”

The Ripoll, Henry and Cooper recommendations are not yet law and there may well be many changes before they are. However, it is obvious that embracing change and taking advice about the best strategies will become more important than ever.

#1 HOW SAFE IS MY SUPER?

Unfortunately, too many people fall into the trap of treating their super as an asset (such as property or shares) and not as a structure that holds those assets. The safety of your superannuation savings will depend on the mix of assets your fund holds.

That’s why it is important to liaise with your adviser regularly, to ensure your asset allocation is in
line with your risk profile and that your managed funds are performing at least as well as their
peers.

Remember, no other investment structure provides the benefits superannuation does.

Super is the only investment you can make with pre-tax dollars and by moving money into the super environment the income tax is just 15 per cent and capital gains tax is just 10 per cent. Once you reach 55 and retire, you can draw $160,000 tax free. When you reach 60, all withdrawals are tax free. Furthermore, if you start an account-based pension, the earnings within the fund itself will be free of tax at the same time as you are drawing a tax free income!

How much better can it get?

Another bonus is that super is the one asset that can’t be touched by the trustee in bankruptcy if you get into financial strife. But what about those with a relatively small super balance? They often ask if they should cash out
and invest the proceeds in interest-bearing bank accounts to protect against further capital losses and ongoing fees.

But advice should always be taken before money in super is withdrawn. In some cases, Centrelink benefits could be adversely affected. A further bonus – before age pension age, superannuation assets are exempt from Centrelink Income and asset Tests.

However the Senior Australians Tax Offset allows a couple who have reached pensionable age to earn $26,680 each and pay no tax. If their main financial asset was $100,000 in super, they may be better off to withdraw the lot and invest outside the super system.

#2 CAN I AVOID CGT?

As the Boomers’ parents age, more and more questions arise regarding the way in which estate assets will be treated for capital gains tax (CGT). To simplify, bear in mind that, in most cases, death does not trigger CGT – it merely transfers any CGT liability to the beneficiaries.

If the asset is disposed of, they may be liable for CGT but if the asset is kept for their lifetime, any CGT applicable passes on, in turn, to their beneficiaries. If the assets are kept indefinitely, CGT could be deferred for generations.

Let’s imagine you have been left an investment property by your late mother. If she bought it before September 20, 1985, it would be CGT free and you will be deemed to have acquired it on the date of her death at its market value then.

Let’s say she paid $90,000 for it in August 1985 and its value was $400,000 when she died on April 1, 2010. For tax purposes, you are deemed to have bought it for $400,000 on April 1, 2010. But you receive the property with no CGT liability because the original owner had none.

If she acquired the property after September 20, 1985, it is subject to CGT and any capital gain is effectively transferred to you. If she bought it for $90,000 on October 1, 1986, the tax office will assume that you acquired it for just $90,000.

These examples highlight the importance of seeking advice before you sell any assets you have inherited as you may find yourself facing an unexpected CGT bill. If you are left a good property or quality shares, try to use that asset to borrow for more investments instead of selling and paying CGT. You can defer CGT, have more assets working for you and claim a tax deduction for the interest on the loan.

CASE STUDY

Jack is a high-income earner who has been left a property worth $600,000. It was bought in 1998 for $200,000 and now returns $24,000 a year. He wants to diversify his assets by buying $600,000 worth of quality share trusts but discovers he will be liable for CGT of nearly $93,000 if he sells the property. If Jack retains it, he will lose $11,160 of the rents in tax and have just $12,840 left.

An option is to keep the property and borrow the whole purchase price of the managed funds. He would continue to receive $24,000 from the property plus $24,000 from the funds. The interest on the loan may be $54,000 a year so he has to find just $6000 before tax out of his own pocket – only $3210 a year or $62 a week. That’s all it takes to retain the property, avoid paying CGT and put another $600,000 of assets to work for him.

#3 SHOULD I SALARY SACRIFICE?

The average Australian has only $140,000 in super on retirement and it’s not unusual for the bulk of that to go towards paying off the mortgage and replacing the car. Rising life expectancies and pressure on welfare will create a two-class society: those who can afford private medical treatment and those who will have to join the queue.

So it makes sense to do everything you can while you are working to pay off your house and boost your super. A strategy worth considering is salary sacrificing to super while reining in the house repayments.

CASE STUDY

A couple aged 55 still owe $200,000 on their house. He earns $120,000 a year. Their goal is to have it paid off in 10 years when they are due to retire, which will require principal and interest repayments of $2322 a month.

An alternative would be to convert the loan to interest only. This would cost $1167 a month, leaving a surplus of $1155. On his salary, $1155 in after-tax dollars is equal to $1909 in pre-tax dollars. If he salary sacrificed $1909 a month into super, contributions tax would take $286 leaving $1623 going to super. If the fund achieved 8 per cent a year, they would have $297,000 in 10 years. They could then withdraw $200,000 tax-free to pay off the loan and have an extra $97,000 in super.

Obviously there are many factors to consider before using the strategy, including the age at which you intend to retire (your super may be inaccessible until then) and how much you currently have. However, for many it can be the best way to go.

A transition to retirement pension (TTR) strategy is a no-brainer for anybody aged 55 and over who is still in the workforce.

CASE STUDY

Jill is 55, earns $60,000 a year and has $220,000 in super.

If she rearranged her package by salary sacrificing $16,000 a year and made up the shortfall in take-home pay by starting a TTR of $13,000 a year, she could have an extra $38,000 in her super by age 65. That’s not a huge sum but it’s money for nothing and would certainly enable her to take a trip and replace the car.

Wednesday, September 15, 2010 THE AGE