With the Government’s current policy focus on increasing the population by way of the baby bonus and ensuring that we are given tax effective structures and environments to save for the long term, the dirty word “superannuation’’ is certainly now a darling amongst the government ranks as well as those that are nearing retirement. However there are a number of misconceptions still out there concerning this structure and based on recent government policy discussion, previous investment structures and strategies need to be revisited.
It is often a misconception that superannuation is an investment. A Superannuation Fund is a structure only. The performance, good or bad will only be affected by the investments held within this environment.
We are often asked how superannuation funds have gone, or broad statements are made concerning the return you should have got from your superannuation fund.
There is no sound benchmark for the return of a ‘superannuation fund’. For example someone who has their superannuation fund invested in term deposits will only ever expect to get a return equivalent to the prevailing cash rate plus some. Currently this sits at about 6%. How can this then be compared with a superannuation fund that is invested in a Blue Chip Australian Share Fund? Based on the last three years they would have received an 18.45% per annum to the 31st July 2006.
The Government is looking to legislate a nil tax on drawings from superannuation post the age of 60, from the 1st of July 2007. Investors will be challenged with regards to ownership of investments outside of superannuation, especially with the growth in self managed superannuation funds and the opportunities that exist within this structure. Should we continue to hold investments in our own name, when there is potentially a zero tax environment at this stage of our life?
Remember, whilst working and contributing to superannuation the structure provides a flat rate of tax of 15% on earnings. This can be reduced significantly through imputation credits which is the tax paid by companies already and passed onto the investor which is used to offset tax payable on other investment income.
With the altering interest rate environment and a reduction in the marginal tax rates, investors will also need to consider their tax planning and gearing strategies.
It is easy for us to forget that only 3-4 years ago the top marginal tax rate was 48.5%, which cut in at an income of $50,000. Meaning the net cost of a negative gearing investment was 51.5%.
We are challenged these days with schemes and promoters that target low to middle income earners with the prospect of potentially high capital growth, with very low yielding investments (income return over the cost of the investment).
It is important to understand that even though a tax deduction is available, on the difference between your income and expenses if negative, you still need to be able to provide the cash flow for the difference. For example if you are on the 30% tax rate you will still need to pay 70% of the cost after tax.
It certainly made sense to negatively gear in the environment of 3-4 years ago on an income of $50,000 however now this benefit is only marginally the same once your income is over $150,000 (46.5%).
It might now be appropriate for us Australians to become net savers and look to reduce our reliance on debt.
With growing concern over the decline in property prices in certain areas of Australia and the reports recently concerning Mortgagee sales increasing significantly, the excesses of the property boom will become a reality to many home owners and property investors, if subsequent interest rates rises continue.
Importantly each investment class and sector has their own advantages and disadvantages. It makes sense to consider all options before entering into a long term strategy, and now even more so than before the structure of superannuation has become more of an option especially to those nearing retirement.
Zach McArthur CFP® is a Representative of Investor Financial Planning AFSL 238244. The information contained herein is for information purposes only and does not represent advice. In order for recommendations to be made which are appropriate for your needs, objectives and goals, please contact your financial adviser.
Source: Primary Focus, Issue No.4, 2006 |
