How to find the perfect super balance now

Super still has a lot to offer if you know how to use it.

Summary: The federal budget’s changes to superannuation raise the question of how to balance assets both inside and outside of super accounts for the best long-term effect. It’s worth remembering that with the tax-free threshold at $18,200 for individuals, a significant amount of assets can be held outside of super, generating income returns that are tax free - provided no other income is coming in. While new contribution limits will mean investors have to consider the types of assets they want to hold outside of their funds, the tax environment in super is still pretty favourable.

Key take out: A 15 per cent tax on contributions and a 15 per cent tax on earnings in super still makes it a valuable wealth generation vehicle – now is the time to consider the balance of your assets with the new rules in mind to maximise your balance when you reach retirement.

Key beneficiaries: General investors.  Category: Superannuation.

Superannuation still remains an extraordinary environment for creating wealth with tax concessions on contributions, fund earnings and withdrawals – it is important to point out that what is being discussed is the balance of assets held inside and outside of super.

Elements of last night’s budget that influence this balance decision include:

• More restrictive limits on contributions, including the $500,000 lifetime limit on personal contributions.

• The $1.6 million limit on superannuation balances that can be transferred to the pension phase of a fund.

• The winding back of the attractiveness of transition to retirement income streams.

• The axing of anti-detriment payments for superannuation accounts.

• The maintenance of the $18,200 income tax free threshold.

Tax free income outside of superannuation

The continuation of the $18,200 tax free threshold for a person (for income tax) means that once that person has retired, they can hold about $350,000 of assets outside of superannuation (assuming income earned at a rate of five per cent), and earn $17,500 without having to pay any tax (assuming you have no other income coming in). These assets are not subject to superannuation rules or costs associated with the superannuation environment – and still effectively provide someone with tax free income.

Example – assets held outside of super (where no other income is earned apart from these assets)

Assets held outside of super – amount $

$350,000

Income earned with 5% return

$17,500

Tax free threshold – individuals

$18,200 per annum

Tax paid on investment income

Nil

The winding back of superannuation fund tax benefits

Superannuation funds paying Transition to Retirement Income Streams will no longer be tax exempt. A transition to retirement strategy often led to significant tax savings for people. These tax savings will be reduced now that the superannuation fund paying a Transition to Retirement Income Stream is no longer tax-exempt. These savings were worth somewhere around one per cent a year of a fund’s balance, or $5,000 per year on a $500,000 balance.

Equally, the limit of $1.6 million per person in a superannuation pension fund reduces the tax effectiveness of superannuation balances once they get above this level.

Anti Detriment payments can occur when there is a death of a superannuation fund member. They are a repayment of superannuation contributions tax, paid to the estate of the deceased superannuation fund member. These are removed in the budget.

The reduction of each of these tax benefits might see people less inclined to simply rush money into superannuation, and more inclined to hold some assets outside of superannuation.

Contributions limits

While we have been talking about the “balance” between assets inside and outside superannuation, the simple reality is that new contributions limits make it harder to get money into superannuation. The non-concessional contributions limit of $500,000 will simply reduce the opportunity for people to make this style of contributions. For example, someone selling an $800,000 investment property at the point of retirement won’t be able to contribute all of the proceeds to superannuation. This will lead to more people having to hold assets outside of the superannuation environment.

Legislative risk

One of the other risks around the superannuation changes, highlighted by the changes in the budget, is the possibility of future ‘legislative risk’, or future changes. While governments can always change the rules for investments inside or outside of superannuation, recent history suggested assets held outside of superannuation are less subject to these changes, albeit that there has been some recent discussion around changes to capital gains tax and negative gearing. People might feel more secure with some assets outside of superannuation, and away from the legislative changes that could potentially enter the system in future.

Conclusion

Superannuation remains an outstanding wealth creation environment. A 15 per cent tax on contributions, a 15 per cent tax on fund earnings and tax-free withdrawals after the age of 60 highlight the value of superannuation. However, changes in the budget will make people think about the balance of assets held inside and outside of superannuation, with an increased likelihood of some assets being held outside of superannuation.