Ask Max: Your questions answered

Is super super? DIY funds, salary sacrificing and testamentary trusts.

PORTFOLIO POINT: Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. Each week he draws upon this experience to answer the questions of Eureka Report members.

This week:

  • Are we being foolish building up our super?
  • What are the benefits of setting up a self-managed fund?
  • Should my wife salary sacrifice up to $25,000?
  • Do I need a testamentary trust for super assets?

Are we being foolish building up our super?

I am 64 and my wife is 53. We have a self-managed superannuation fund. My account is in pension phase and hers is in accumulation phase. Ninety five per cent of the assets in our fund have been from non-concessional contributions. Since I turned 60 our tactic has been to maximise my non-concessional contributions to increase the tax-free component of our assessable income.

We are planning to maximise my wife’s non-concessional contributions over the next two years in anticipation of her being able to access her super at age 55 and to retire at that time with about a 95% tax-free pension component. In other words, we have been shifting the vast majority of our personal investments into our super fund to fund our tax-free retirement under the present rules.

We anticipate having a super balance of about $1.7 million, which would be in pension phase for both of us after my wife retires in two years. One of Bruce Brammall’s recent articles contains a statement which has rocked my world. He states: “The seriously wealthy will always have non-super investments on which they pay tax. If they don’t, they are utterly foolish as superannuation is at the whim of the government.”

We are not “seriously wealthy” by any means. Are we being “utterly foolish” to try to build up our superannuation fund in anticipation of using it to fund a tax-free retirement under the present rules? If so, what should we be doing?

Bruce was partially right when he said that superannuation is at the whim of the government. It is interesting to note that over the last 30 years Labor governments have tended to reduce benefits and increase taxation for super, while the Coalition has tended to improve benefits and decrease taxation of superannuation.

Another lesson from history relating to superannuation is that over the last 30 years when legislation is changed, grandfathering has been applied. This means whenever there has been a change people have their existing benefits protected.

That is one of the main reasons why our superannuation system became so complicated. The different components that existed just prior to July 1, 2007 resulted from benefits accumulated before each change. An example of this was the pre-1983 benefits that only had 5% of the lump sum taxed.

I am not saying that there won’t be changes in the future, but if you take what governments have always done in the past, the benefits you have accumulated under the current system should be protected. Any government that introduced what is effectively retrospective legislation could not expect to stay in power long.

What are the benefits of setting up a self-managed fund?

I’m planning to retire in at the most two years time. By then, I should have an index-linked CSS pension of about $64,000 p.a., plus a total lump sum of around $500,000 which I would invest in a super fund. The conventional wisdom seems to be that it’s best to go with an SMSF with a sum of that size.

I’ve had some discussions with Dixons Advisory about setting up an SMSF with them. I should emphasise that I have no financial expertise and would heavily rely on an organisation such as Dixons for my investment decisions, should I decide to go down that road.

Dixons is by all reports a highly reputable and competent company. However, they are talking in terms of total annual fees, in the region of over $6000, though that could come down somewhat, once the fund is up and running. 

At present part of my lump sum is invested in Australian Super’s default fund with returns of currently something over 6%. Australian Super fees are significantly lower. Everyone talks about the ‘greater flexibility’ of self-managed funds. The question is whether that flexibility translates into better returns.

In short, bearing in mind the extra costs of an SMSF, would I be better off shoving all my ‘dosh’ into Australian Super, or going for the SMSF option? Would the potentially higher returns from an SMSF outweigh the extra costs? I imagine that I’m not the only person wrestling with this dilemma.

The cost of an SMSF is made up of two components. The first is the set-up cost, which can vary depending on who is used and how you intend to operate the fund. Fees charged should be approximately $700 where individuals act as trustees and $1500 if a company acts as trustee. This is a once-off non-recurring cost.

The other cost is the yearly administration cost. This is made up of professional fees to maintain the accounting records, prepare the tax return for the fund and an auditor’s fee.  As you have found with the quote from Dixons, this annual cost can be high.

In some cases the fee is charged as a percentage of the funds in the SMSF, while others charge a fee based on the complexity of the SMSF and whether it is in pension phase or not. If you are using an accounting firm specialising in SMSFs your annual administration fee should be between $1800 and $3000.

Generally investment advice is offered when the SMSF is set up and there is also ongoing advice for those wanting ongoing strategy advice and their investments monitored. I am sure there are other accounting firms that offer similar levels of advice and service. This service is also charged as an annual fee and varies depending on how often a review is conducted.

You could try contacting the Self Managed Super Fund Specialists Association of Australia (SPAA) and find out what SMSF specialist advisers are in your area. One advantage of an SMSF over Australian super is the ability to have the income from your investments paid into a bank account that pays your pension. Currently Australian Super does not offer this.

If you are still unsure of whether an SMSF is your best alternative you should contact a professional who can provide a comparison of the different costs and benefits. The important thing to remember is that you do have a wide choice of administrators that can be used if you choose an SMSF, but you need to do your homework first to make sure you are getting value for money.

Should my wife salary sacrifice up to $25,000?

I am on a high salary and my wife works part-time and earns approximately $34,000 per annum. Should she salary sacrifice up to the full $25,000 concessional contribution limit? That would maximise our contributions to super as a couple, but would that approach mean that she would be paying 15% tax on the super contribution, whereas any salary below her tax-free threshold of around $18,200 is currently tax free?

You are right about super contributions being taxed at 15% while the income is not taxable below $18,200. Care also needs to be taken when salary sacrificing the maximum to ensure that your wife’s salary sacrifice amount, when combined with her employer super contributions, do not create an excess contributions tax problem.

You could consider salary sacrificing for your wife down to the $18,200 level, as long as this does not create the excess contributions problem, and then contribute the balance as an after-tax non-concessional contribution. Before taking any action you should seek professional advice from someone who specialises in this area.

Do I need a testamentary trust for super assets?

I have a SMSF with a little over $1 million in assets. I pay the minimum pension to myself (my wife has her own considerable superannuation assets, so is not involved in pension payments) and re-invest the excess. I wish to leave her the fund and some shares I have outside super in as tax effective way as possible. We have binding death nominations to each other and my daughter after that. We are the joint trustees of the SMSF fund.

What are the advantages and disadvantages (if any) of the testamentary trust approach if set up by a competent lawyer? I understand the trust only springs to life when I pass away but does the superannuation trust deed still operate – or does it just go away, and how does all this interact?

Setting up a testamentary trust through your will would not gain anything in relation to your pension account. Testamentary trusts tend to relate to assets held outside of superannuation. If you want to make sure that your wife receives your pension upon your death you should make it a reversionary pension.

You will however need to consider what will happen to your SMSF when one of you dies. Your daughter could become a trustee now or upon the death of either of you, or you could appoint a company either now or upon your death to act as trustee. You should seek advice from a professional that specialises in estate planning.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au

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