MISA HAN and JOANNA MATHER
Limits on superannuation contributions and total balances mean that some can struggle to get as much money as they would like into their superannuation. For this group there are a number of extra options to build retirement income in a tax efficient way.
Since July 1, 2017 superannuation savers have been limited to annual contribution caps of $25,000 pre-tax and $100,000 after-tax or $300,000 if they spread the money over three years.
Savers will also need to be mindful of the $1.6 million total superannuation balance cap. Once they reach that amount they can no longer make after-tax contributions to their super.
"With the new rules, it's not possible to build a lot of wealth in super," says KPMG partner Damian Ryan. "The days of people having $5 million or $10 million in super are over in my view."
While superannuation is still the most tax-efficient retirement savings tool, there are additional methods to build up wealth. Experts argue the most effective of these include topping up a spouse's account balance, setting up trusts, putting money to work in investment markets or in property, or downsizing the family home.
Investment and trusts
Dixon Advisory head of advice Nerida Cole agrees that lower contribution caps are set to increase the difficulty of building a very large superannuation balance.
One potential option for those with extra funds is to reconsider their superannuation investment portfolio to focus on growth, because investment earnings can grow beyond the superannuation balance cap. In the new superannuation regime "investment performance becomes even more important," according to Cole.
"Those with the capacity to put extra away as early as possible in their career will have a chance to benefit from even average returns because of the power of compounding interest over long time frames."
Anne-Marie Tassoni, partner at Cameron Harrison, says those looking to invest to top up their superannuation need to decide whether to invest in their own name or via a family trust.
The former may be an appropriate option for those who don't want to incur the cost or the trouble of setting up a company structure or a family trust, she says.
For business owners such as lawyers and doctors with their own practice, placing wealth in a family trust will give them better protection in the event they are sued, she says.
A family trust can also be a better option if there are a number of beneficiaries, she says, such as a non-working spouse or adult children on a low income.
However, this may no longer be a viable option if Labor delivers on its promise to impose a minimum 30 per cent tax on trust distributions.
Koda Capital partner and adviser Ben Andreou says that, since the introduction of the total balance cap, high-income earners are contributing to their spouse's super if their balance is under $1.6 million or investing the money using a family trust structure to take advantage of tax efficiencies.
But given the cost of setting up and running a family trust, such a move is worthwhile only if they are accumulating wealth and earning more than $180,000 a year. "You should ask yourself: am I accumulating wealth and am I at the top marginal tax rate?" he adds.
KPMG's Ryan says that the caps have funnelled some accumulators into areas like property investing to take advantage of tax structures such as negative gearing.
Still, he warned that option may not last much longer, with the attractiveness of property investing currently under threat from Labor's proposal to limit negative gearing to new housing and reduce the CGT discount to 25 per cent should it win the federal election.
For older Australians facing the $1.6 million total superannuation balance cap, downsizing is an option.
In the 2017 budget, the government said it would enable downsizers over 65 to make a non-concessional contribution of up to $300,000 into their superannuation fund from the proceeds of the sale of their principal home to free up more housing stock.
Individuals can add up to $300,000 ($600,000 per couple) to their super from the proceeds of selling their family home even if it means going over the $1.6 million total superannuation balance cap.
Andreou says that although he is getting questions about the downsizer exemption, he has not seen a significant uptake since the change came in on July 1 last year. "I don't think people are rushing to sell their main residence."
Downsizing in the current market does not necessarily mean buying a cheaper home, which means clients don't end up with a significant lump sum to add to their super, he says. "When clients do downsize they might downsize in square metres, but they might not necessarily downsize in price," he adds.
Super still king
If you are a retiree, Tassoni says that, despite the introduction of the transfer balance cap, most of her clients with more than $1.6 million in retirement phase on July 1, 2017 have kept the money in their funds.
She was referring to the $1.6 million limit on the total amount of superannuation that can be transferred into the retirement phase where earnings are tax-free.
"Certainly from the tax point of view, superannuation is still the best investment vehicle," she says. "The vast majority of our clients have not done anything differently."
At 15 per cent, the accumulation phase tax rate for earnings on balances above the $1.6 million pension cap is still more favourable compared with other investment vehicles, such as a company structure, which attracts tax of 30 per cent, she says.
Andreou agrees that for clients who already had more than $1.6 million in their super as at July 1, 2017, keeping the money in superannuation still remained the best option.
Any balance over $1.6 million transferred to the accumulation phase will still be eligible for the capital gains tax discount (and will be taxed at 10 per cent instead of 15 per cent).
"For many taxpayers, having funds in super is still the most tax-efficient way to hold wealth," he adds.
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