21 – Superannuation awareness required
Australia has a world class retirement income system. This is largely due to the prescience of the ACTU and the Federal Government in the early eighties in mandating universal minimum contribution rates.
Super has now grown into one of Australia’s largest economic sectors, and is usually the second largest asset owned by Australians including most financial planners.
Superannuation now must be considered in virtually every transaction: can this investment be owned by a SMSF? Can we pay the premiums out of super? Can we pay the adviser fees out of super?
Advisers must be superannuation aware.
Super and tax
Super is driven by tax benefits. The summed effect of these tax benefits means less tax is paid than otherwise will be the case: this is deliberate government policy.
There are three main tax benefits. These are:
- a deduction for concessional contributions up to a statutory maximum
- a low tax rate on investment earnings in the accumulation phase and no tax on investment earnings in the pension phase and
- low or no tax on benefits paid to members or dependants.
If a client is get the best out of a long term super strategy advisers should emphasise:
- starting early, ie at age 18 or in some cases even younger
- paying as much each year as possible, usually in a concessionally taxed form
- finishing late, in the sense of delaying the start of the draw-down period and
- minimizing costs.
Superannuation awareness required!
Advisers must be constantly aware of superannuation, and its tax benefits. You must understand super’s role in the wealth accumulation process to be an effective tax adviser.
You can read more about Dover’s approach to superannuation here: The Financial Planner as a Superannuation Adviser.
For example, an adviser rang to discuss a client’s plan to borrow to buy the house next door. The client was recently retired at 64, not that wealthy, and had made up her mind to buy the property no matter what the adviser said.
She was outside Dover’s conservative SMSF gearing rules. The adviser was surprised to learn Dover would make an exception for her. Our reason was simple. She was going to buy the property. The question was “how should she buy the property? She had two options. In her own name? Or in her SMSF’s name? She was retired, and almost age 65 anyway, so access to benefits was not a problem. There was no real difference between the two options, except that her SMSF was tax free, being in pension mode, and she was not tax free.
In fact in circumstances like these if an adviser insisted the client not use her SMSF the adviser could well be exposed to a negligence claim, with the damages equal to the unnecessary tax paid on the capital gain. This example arose in in Sydney in 2012. The market has risen 40% since then. The damages could have been huge…
Her SMSF is just her investment vehicle. It’s really her. An investment alter ego. And its tax free. This means her SMSF should be the preferred vehicle for any investment she makes, provided it is permitted by the SMSF rules. The house next door is almost always a good investment, and its permitted by the SMSF rules.
Advisers must be superannuation aware if their advice is to be tax efficient and tax effective. Advisers must always ask “would this investment do better in an SMSF”? And often the answer will be “yes”.