Will Your Family Have $3.2million in your Australian Tax Haven at age 65? ($1.6million For Singles) Will You Live Tax Free From Age 65 to 105?
- Paul Keating started the ball rolling in 1993 with compulsory super contributions of 3%.
- In September 2006 Peter Costello introduced massive changes to boost retirement savings in Australia which saw massive inflows into the Superannuation System over the next 10 years making Australians one of the wealthiest nations in retirement. This allowed many who did not have enough in super, particularly those over 50 to significantly contribute more to their savings.
- In September 2007 Peter Costello passed laws allowing Superfunds to Borrow to buy Investments using Limited Recourse Borrowing Arrangements.
- Scott Morrison in his wisdom decided in May 2016 to restrict super contributions effective 1 July 2017 by reducing the maximum deductible super contribution (at 15% tax) to $25,000pa and to reduce after tax contributions to super to $100,000pa.
And only in Australia can you run your own Tax Haven. Generally, where the total funds are over $200,000 you can run a Self-Managed Superfund. You are limited to 4 members but for most families it's Mom and Dad combined who run an SMSF. However, singles can run an SMSF, same sex couples or perhaps 2, 3 or 4 like-minded people can get together and run an SMSF.
Sure, the above is a simplified summary of the history behind the Australian Government's push for Australian's to become less reliant on the Government Age Pension by being self-funded. The Incentive? 15% Tax on Income and 10% Tax on Capital Gains and Zero Tax in Retirement! Where else in the world do ordinary people get to use a Tax Haven for their savings? USA? No - Donald Trump only passes tax cuts for the wealthy! You are taxed on your pensions. UK - You are taxed on your pensions and lump sum withdrawals at your marginal rate. Australia? Tax Free in your Superfund on retirement and the pension is tax free in your personal hands! That's right - Zero Tax.
So here we are today with SMSFs holding over a third of the total Super Investment Pool. There are nearly 600,000 SMSF's controlling $700bn in assets. The remainder being held by Industry/Trade Union Funds and Insurance Companies, a few Small APRA funds, some Public Sector Funds and a few Corporate Superfunds. The Total Funds in Super are $2,138bn so SMSFs make up about 30% of the total and continue to grow in popularity. Back in 1998 SMSFs only held 10% of the total, and by 2004 this had grown to 20% of total super. Today half of the SMSFs have balances under $500,000 and half have balances over $500,000. In ten years’ time I guess SMSFs will hold 40% of the total and exceed $1 Trillion in assets. That's an amazing amount of money.
Now how does this apply to you, the ordinary Australian? The first point to note is that with reduced annual concessional contributions of $25,000 pa you can no longer leave it to the last minute to catch up your super balance. Yes, your employer has to contribute 9.5% of your salary or wage from the day you start work and these savings will continue to grow to retirement. But if you start on $50,000 salary this is only $4,750pa and the government takes out 15% tax reducing this to $4,037pa. Now what if you could add a bit more to this in the early years? Let's say you could salary sacrifice $100pm to super. This is $1,200 pa less 15% adds $1,000 to your super at age 20. This single year's contribution after tax of $1,000 could be worth $24,000 extra at age 60. Do this every year to age 30 and these contributions totaling $12,000 could increase your super at age 65 by an extra $450,000. How is this possible? It's the simple effect of compounding annual returns to age 65. The lesson - start saving as young as possible and you can retire comfortably. Sure, you may get lucky and strike it rich or win lotto but this is the real way to guarantee a comfortable retirement.
So, you are a bit older than 20, perhaps 40 or 50 or older and your super is not at the level you want to be at. Home loan to pay off, kids haven't left home yet. How do you catch-up your super? Should you salary sacrifice to the max of $25,000 or make personal deductible contributions? What if you inherit money, how can you put this into your superfund? Should you pay off your home loan first or should you make deductible super contributions first and then at age 65 draw out a lump sum to pay off your home loan? These are a few simple steps in the planning process.
And now to the advanced strategies. How real, long term wealth is created with SMSFs and Family Super Funds using innovative investment strategies tailored to the member as well as making the most of all tax concessions, tax offsets and credits in the Fund. How many SMSF Trustees engineered a successful investment strategy in the last GFC and what to do when another asset downturn comes around. Get the inside scoop on the SMSF strategies that the big end of town use.
One of the latest changes relates to the Personal Transfer Balance Cap which limits your tax free super account to $1.6million. The rest stays in your taxable super account. Here's one common scenario. Just say one spouse is employed and could end up with a balance of $3.2mil in super while their spouse has very little in super. That means only $1.6million tax free. What they should do early on is Contribution Splitting, that is gift their annual contributions after deducting 15% tax to the spouse/partner with a low balance. That way they both can get $1.6 million tax free in Retirement!
Now I would like to ask SMSF Trustees one question. "What is important to you in your life right now?" And 98% of the time, guess what was consistently in the top three ranked answers? "Family!" And 98% of the time when asked what was important to them about family, it will be looking after them financially, spending time with them, enjoying their company. In Grant Abbott's latest book "The Guru's Guide to SMSFs" he covers the Family SMSF aka the Family Super Fund. It is different from the single member focus of a retail and industry fund, and also the investment control theme of a standard SMSF. It is Family first and Family built.
So why is Family SMSF important to advisers and Trustees now? Well two seemingly innocuous changes that have been made to the super rules usher in a new era of longevity, family, tax and estate planning in SMSFs.
The first one (and certainly one that has gone unnoticed for ten years) was the simple amendment in 2007 to SIS Regulation 6.21 to enable a super account to remain in accumulation until the member's death. So, no pension, no forced lump sum withdrawals – just long-term wealth creation until the member dies. Think about it – a 70-year-old SMSF member has a Family Trust with $3m in assets, limited tax effective beneficiaries, enough income to live on from the Trust and $2M in their super fund.
Would you set up a pension or hold the super assets in the Fund? They are flush with cash and could use it to help the Family financially now, but also store it for providing a financial windfall through a SMSF BDBN or better still, a SMSF Will.
The second change is recent and occurred in 2017 when the Personal Transfer Balance Limit was introduced. The PTB limits the amount of super benefits a member may use to establish a pension. Any excess must remain in the member's accumulation account. Again, think about it – a 65-year-old client has $2.5M in their accumulation account in their SMSF, are frugal and only want $40,000 per annum to live on.
How much should they transfer to their pension account to nail their income requirements and what should stay in their accumulation account?
And with these accumulation accounts what should we do with them? That's where the High Voltage part comes in - with estate planning being a prime candidate. But, there are so many more family applications and strategies. Can you think of any?
Now I could think of ten more cases that are in the same vein and I know there are thousands if not tens of thousands and possibly, a hundred thousand funds that need to be given a High Voltage shock.
The Perth launch of Grant Abbott's book "The Guru's Guide to SMSF's took place at 5.30pm on 27 November 2017 and was proudly sponsored by Sondergaard Accountants and Westgen Solar Bonds.
We would like to thank Grant Abbott for a large portion of the content for this article. Grant is a long-term friend and colleague that Charles Sondergaard has worked with for perhaps the last ten years or more.
Thanks for reading and let's catch up soon.