Search for superannuation’s secrets
The new game may be exploitation of superannuation procedures little used or understood until now.
Some of the moves will be obvious — such as escalating contributions between now and July 1 next year when the new, tighter laws kick in. But the larger game may well be the exploitation of superannuation procedures little used or understood until now.
Advisers expect to see a major uplift in arrangements that plot the use of superannuation allowances much more closely with other tax structures such as trusts and which focus closely on the interplay with Centrelink benefits.
The essential features of the changes, though widely reported, remain little understood by the majority of investors because they are complex and also because they have changed since they were first announced in the May budget.
It is too early to tell if the changes will arrest the broader rise in popularity of SMSF funds. In the immediate future, advisers suggest investors need first to reexamine the basic residual attractions of super and make readjustments to allocation settings if necessary.
Advisers also point out that for a certain strata of the investor market, those making close to average annual salaries, the political failure of the new system is that in some cases in terms of annual income in retirement (where you do not wish to draw down on principal savings) you may be better off saving less and maximising government benefits. This flaw in the system will surely need to be revisited by Scott Morrison sooner rather than later.
The assets shuffle
Between now and July 1, the key issue for most investors will be asset allocation: is there too much or too little in super, considering the new $1.6 million cap?
For investors faced with a requirement to reshuffle assets, property assets created a vexed issue due to the big ticket nature of property transactions. Every situation is different, but most advisers suggest it would be an over-reaction to sell property should the value of an investor’s net assets top $1.6m (the new 15 per cent tax is on the earnings on the amount which is over $1.6m). In other words, it may be less troublesome for many people to pay what may be a relatively small amount of new tax rather than up-ending long-term financial plans.
The lucrative loan
Advisers expect superannuation savers with SMSFs to explore more aggressively strategies that have until now been used by only a small number of very wealthy investors. For example, under current arrangements, an individual can borrow from — or lend to — their own DIY fund.
For people who may exceed the $1.6m cap, the facility may now become more valuable. Take for instance the ability to lend into a DIY fund.
A person has $1.6m in super — they have engineered a situation so that the amount in their balance is the optimum figure — no more and no less. They have other funds outside super. They lend, say, $200,000 to their super fund. Remarkably, this can be done on good terms. The current rate as guided by the Australian Taxation Office as of May is 5.85 per cent. The super fund is not exceeding the cap because the loans are a liability to the fund not an asset. Remember, the $1.6m cap is based on net assets.
At the same time, the individual gets paid 5.85 per cent or $11,700 a year by the fund in personal income. Every Australian is entitled to tax-free personal income up to $18,200 a year; consequently, the fund has been used in a new way to further bolster tax-free income.
Trusting more in trusts
Advisers now suggest so-called discretionary trusts will become more important in long-term wealth planning. Trusts can allow investors a tax shelter on money which is not spent but held within this arrangement. They can also be useful in conjunction with personal affairs.
In an example of a unit trust procedure, investors may try to optimise the best of superannuation and negative gearing opportunities in a single exercise. An example might be where an investor who also has a DIY super fund uses the ungeared cash assets in a super fund, say, $100,000, to put a deposit on a property. The DIY fund and the individual share ownership of a unit trust. The fund puts in the deposit the individual takes on the loans and gets the negative gearing tax breaks. We will see a lot more of it in the future of this joint venture arrangement, which is a neat example of mixing the powers of negative gearing with residual advantages in superannuation.
Wealth editor James Kirby hosts a live investment Q&A at www.theaustralian.com.au every Wednesday at 12.15pm.
With an overhaul of superannuation finally being passed into law this week, Australian investors are expected to launch a range of new strategies in the months ahead.