I'M investing in my children's names for their future by accumulating the money in a high-interest bank account, then buying index exchange-traded funds. The children will be affected by the removal of the low-income tax offset for minors, which came into effect on July 1. I've read about insurance bonds but these have fees attached and seem complicated. I'm also worried the government might close the tax loophole.
Insurance bonds are not complicated. In some ways, they are similar to super because the tax is paid by the fund on behalf of the owner. A product such as the Austock bond has low fees and allows the buyer to switch between the underlying fund managers without incurring capital gains tax. Investment bonds have been around for many years and there is no suggestion their 30 per cent tax status will change.
My husband and I have $600,000 each in super. At 60 and 58, we are nervous about losing more in a market downturn. We're thinking of leaving it in super but switching to cash. After the last crash, my husband did this but I remained invested. We would like to work until 65 but neither of us has job security. We both salary sacrifice my husband to the maximum I have just started. Net income for the past year was $120,000 combined and we are debt-free. We live frugally in a modest house and have company cars. We will need our super when we retire or lose our jobs because we will relocate and buy a better home, vehicles and so on. What is your advice regarding a switch to cash within super, as well as the bigger picture for us?
With total super of $1.2 million, you are well placed for retirement so you need to balance your needs with your risk profile. If you are particularly nervous, you could switch a large part of your portfolio to cash but understand this would lock in present valuations, which are 25 per cent less than what they were in April. An option if you decide to switch to cash would be to salary sacrifice to the maximum into share-based investments. This strategy would enable you to buy shares cheaply if the market continues to be volatile.
Could you please clarify whether a self-funded retiree has to pay tax on interest earned on term deposits. If so, what is the tax-free threshold?
A self-funded retiree is subject to the same tax obligations as any other citizen. However, a person who is eligible to receive an age or service pension, even if no pension is actually paid, is entitled to the senior Australians tax offset (SATO), which means a couple could earn $26,680 a year each without paying tax. The offset reduces by 12.5? for each additional dollar earned and cuts out entirely at $39,496. The numbers for a single are $30,685 and $48,707. If you are not eligible for SATO, you would still be eligible for the low-income tax offset, which gives relief on a sliding scale until income reaches $67,500 a year.
Is investing in income-producing shares with dividends reinvested a good way to grow my super balance, thereby possibly circumventing a sharemarket that may move sideways for an extended period in the future? Or is this what a balanced fund does?
I've always recommended reinvesting dividends because this accelerates the power of compounding. The only problem with dividend reinvestment is that the choice of stock you buy is taken out of your hands. An alternative strategy is to have the dividends paid into a separate bank account and then invest them in shares of your choice. You can do this with most managed funds by ticking the reinvestment box all a balanced fund does is spread your assets over a range of classes.
Noel Whittaker AM is a co-founder of Whittaker Macnaught. Advice is
general and readers should seek their own professional advice.Contact noel.whittaker@whittaker macnaught.com.au.
Questions to: Ask Noel, Money,
GPO Box 2571, Qld, 4000, or see moneymanager.com.au/ask-an-expert.
Frequently Asked Questions about this Article…
Will investing in my children’s names with a high‑interest account and index ETFs be affected by the removal of the low‑income tax offset for minors?
Yes — the removal of the low‑income tax offset for minors (which came into effect on July 1) means children holding investment income may pay more tax than before. Consider tax‑efficient wrappers (see investment/insurance bonds below) or speaking to an adviser to understand the specific tax impact on savings held in your children’s names.
What is an insurance or investment bond and are investment bonds complicated for everyday investors?
Investment (insurance) bonds are not complicated — in many ways they act like super because the fund pays tax on behalf of the owner. They can be simpler to manage than holding investments directly and are designed to have tax paid within the product rather than personally at individual rates.
What features do products like the Austock bond offer for investors worried about tax and trading costs?
Products such as the Austock bond are described as having low fees and allowing investors to switch between underlying fund managers without triggering capital gains tax. That makes them useful if you want internal flexibility without crystallising gains for tax purposes.
Is the 30% tax status of investment bonds likely to be changed by the government?
According to the article there is no suggestion that the 30 per cent tax status of investment bonds will change. While future law changes are always possible, the piece notes that investment bonds have been around for many years and their current tax treatment has not been flagged for removal.
Should I switch my super to cash if I’m nervous about a market downturn?
You can switch a large part of your super to cash if you’re risk‑averse, but be aware this locks in current valuations (the article notes markets were about 25% below April levels). A more balanced approach mentioned is moving some money to cash while continuing to invest new salary sacrifice contributions into shares to take advantage of lower prices during volatility.
How can salary sacrifice be used inside super if I want to buy shares more cheaply during market volatility?
One option is to salary sacrifice to the maximum into share‑based investments while holding a larger portion of your current balance in cash. This lets you continue contributing and buy shares at cheaper levels if markets remain volatile, rather than fully locking your existing balance into cash.
Do self‑funded retirees pay tax on interest from term deposits, and are there tax offsets that reduce tax for older Australians?
Self‑funded retirees are subject to the same tax obligations as others. However, those eligible for an age or service pension qualify for the Senior Australians Tax Offset (SATO): a couple could earn about $26,680 each without paying tax and the offset phases out as income rises (cutting out at about $39,496 for each). Singles have different thresholds (about $30,685 and cutting out at $48,707). If not eligible for SATO, retirees can still access the low‑income tax offset, which provides relief until income reaches around $67,500 a year.
Is reinvesting dividends a good way to grow my super and how does that compare to investing in a balanced fund?
Reinvesting dividends is recommended because it accelerates compounding, but automatic reinvestment means you don’t choose which stock you buy. An alternative is to have dividends paid into a bank account and manually reinvest them into shares you select. A balanced fund, by contrast, simply spreads your assets over a range of asset classes to manage risk rather than focusing solely on dividend income.
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