22 – Migrate assets to super as age 60 comes closer

  Cost Value Debt Net Value
Shares in Herbette’s name $1,000,000 $1,080,000 Nil $1,080,000
Caroline Springs residential property investments in Herbette’s name $1,000,000 $900,000 Nil $900,000
Home $1,000,000 $1,500,000 Nil $1,500,000
SMSF $1,000,000 $1,200,000 Nil $1,200,000
Total       $4,700,000

The problem

Herb and Herbette are clients of a Dover risk adviser. Back in 2012 their adviser asked MLA Lawyers and Simple Para-planning for ideas on how to improve their long term financial profile. The adviser had attended a Dover CPD day and realized that a lot could be done but was not sure how to do it.

Herb and Herbette’s financial profile is summarized in the above table. in 2012 they were both 57 years old, and were looking forward to tax free investing once they turned age 60.

The Caroline Springs residential property investments were bought off the plan via Herb’s former adviser. Herb wanted to buy an existing property in Kew. They said by two hours in Caroline Springs, and save stamp duty! It was a decision Herb has regretted ever since. Kew has boomed and Caroline Springs has not. Herb has learnt that the best properties are close in where demand is higher and likely to stay higher for the next thirty years.

The solution

The solution was simple: migrate their wealth to the SMSF as age 60 approaches, start a pension and invest completely tax free from then on. The SMSF is concessionally taxed on its investment income until age 60 and from then on its investment income is tax free.

In particular:

  1. sell the Caroline Springs residential properties and pay the net sale proceeds of $900,000 to the SMSF as a non-concessional super contributions ($450,000 each) before 30 June These properties were thought to have low future capital gains prospects and the sale in fact realised a capital loss of $100,000
  2. use the $900,000 in the SMSF to buy a new four bedroom town house in Kew, to be rented out to long term tenants
  3. in July 2015 (ie the start of a new three year period) sell the shares and pay the net amount to the SMSF as non-concessional super contributions ($540,000 each). The capital gain on these shares $80,000 was offset against the capital loss of $100,000, which meant there was no CGT on this transfer
  4. use the $1,080,000 in the SMSF to buy blue chip Australian shares (and index funds)
  5. reinvest the net earnings in the SMSF in blue chip Australian shares (and index funds) and
  6. never sell any investments in the SMSF.

The primary purpose of this strategy was to maximize expected future retirement benefits for Herb and Herbette as members of the SMSF. This meant the sole purpose test was satisfied. No problem there.

The end game

By age 60 Herb and Herbette’s only assets comprised the home, which is tax free, and their SMSF, which is also tax free once the pensions start.

They have nearly $5,000,000 invested, probably earning nearly $450,000 a year including capital gains on average in the long run, according to the Russell ASX Long Term Investing Report. And pay no tax. 

Herb and Herbette have gone from a high investment tax profile to a nil investment tax profile. This means the after tax return on their investments is higher, the compounding effect is  stronger, and they will be wealthier than otherwise.

Another happy client for the next thirty years.

The lesson learned

Its a great time to be age 60, or approaching age 60. The tax rules are set, deliberately, firmly in your favor. By choosing tax efficient investments and tax efficient investment structures amazingly efficient tax results can be achieved. 

The Dover Group