Question 1. You always seem to be promoting super over everything else!
Well, perhaps not always, but I do on a consistent basis.
The main reason is for the tax advantages, and it’s worth going over a couple of examples to highlight the benefits which I believe most people still do not fully grasp.
Firstly, salary sacrifice provides an immediate and large benefit for medium- and high-income earners.
If you earn between $45K and $120K you pay income tax at 34.5 per cent (including Medicare). If you earn between $120K and $180K then the rate is 39 per cent.
Whereas a super fund charges only 15 per cent contributions tax.
Let’s look at two examples:
- John earning $80K and salary sacrifices $10K to super.
His tax saving is $1950, or 19.5 per cent. - Jenny earning $130K and also salary sacrifices $10K to super.
Her tax saving is $2400 or 24 per cent.
The return is 19.5 per cent to John and 24 per cent to Jenny, guaranteed! Regardless of any market movements. What other investment can guarantee this rate of return?
On top of this, there are additional benefits such as:
- Money invested in super only attracts a 15 per cent earnings tax, rather than you having to invest the funds outside and pay tax on the earnings at your marginal rate.
- If you take the money out from age 60, via a lump sum or regular income stream, it’s all tax free.
- Over the last 10 years (to 30 June 2022) Balanced funds have returned on average 8 per cent per year (source SuperRatings SR50 Balanced index).
Superannuation is a compelling investment and retirement vehicle.
The main downside is that you cannot access your money until you reach at least age 60 and retire, so for younger investors you may not want to tie up too much of your funds into super too early, but once you hit ‘middle age’, super should be targeted.
Question 2. I am 75 and a self-funded retiree and have a ‘nest egg’ super fund of which approximately $600,000 is taxable. We live comfortably on other assets and do not foresee having to draw on this fund and will leave it to our only grandchild, but are concerned about the ‘death duty’ tax.
I understand recent legislation permits withdrawal and the funds are then used as a non-concessional contribution to increase the tax-free component. Is this correct and if so, how much can be withdrawn and recontributed annually?
Yes a ‘cash-out and recontribution strategy’ to reduce future tax for individuals who are classified as ‘non-tax beneficiaries’ (such as grandchildren or adult children) is a popular strategy. If death benefit proceeds are paid to a spouse or your children that are under 18, then no tax is payable.
The tax is applied at a rate of 15 per cent (plus Medicare) but only on the ‘taxable’ component. The tax-free component is always paid tax free. Your super fund will be able to advise you of your tax components.
Funds contributed to super as non-concessional (after tax) contributions always go into the ‘tax-free’ component of the account.
You can withdraw as much as you want but the problem for you is now that you have turned age 75 you are now no longer eligible to contribute to super.
Depending on your overall situation and how important a goal it is to reduce future tax for your grandchild, you may want to withdraw some funds from super and keep them invested outside.
Ideally, you would still keep most funds in super, and only withdraw funds to avoid the tax if you become seriously ill and your death was imminent. However, as you may have realised, the flaw in this strategy is you may die unexpectedly.
3. Can I set up and contribute to individual, separate super funds for my grandchildren now aged nine, 11 and 13?
There is nothing in the superannuation rules that would stop you from doing this.
The contributions would be known as a ‘child contribution’ and treated as a non-concessional (after tax) contribution of the child.
There are a few practical issues to address. Firstly, the children will need to apply for a tax file number so they can have this recorded within their super fund.
Next, not all super funds accept this type of contribution but many do, best to check with your preferred fund.
If the fund does accept these contributions, they will require a parent or guardian to be a signature on the account as a child will not have the legal capacity to do so.
Making contributions now will obviously mean the funds will be able to enjoy the benefits of long-term compound interest and set the kids up for a more enjoyable retirement. However, the main downside is they won’t be able to access contributions and earnings until they reach age 60 (and that may change between now and the next 50 years).
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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