Summary: If tax rates in super were increased, investors might choose the investment alternative of negative gearing. As well as significant tax breaks, advantages of negative gearing include never having to sell assets. Investors can pass investments on through the generations and if no-one sells them, there will never be a capital gains tax event.
Key take-out: The level of super tax concessions is relative to the tax rates on offer through other structures.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
If you lifted the tax rate in super, would you necessarily pick up the extra tax?
Well, no. In fact, you might collect less tax over time. People who aspire to be wealthy have other tax rates they can consider and choose.
Including negative tax rates.
Negative gearing is, at present, a legitimate investment alternative, for those who understand the risks and are prepared to take them.
You can receive significant tax breaks on negative earnings for investing in property or share portfolios, largely investing in the same assets that you would inside your super fund.
There are also other advantages of negative gearing in your personal name.
For a start, an advantage of investments (including geared investments) outside of super is that you never have to sell them. You can pass them on through the generations and if no-one sells them, there will never be a capital gains tax event, though it is likely the ever-increasing income stream will be taxed at marginal rates.
Inside super, the minimum income payments increase over time (from 4% at age 55 to 14% for those over 95 years old) from a super pension fund meaning that you are likely to have to sell assets at some stage (though you’ll probably pay no tax).
However, once you die, your assets do need to be sold. And then either tax needs to be paid (if paid to non-dependents) or will be paid out as benefits, where they will likely be taxed again once generating income in the non-super environment.
As it stands currently, someone with $10,000 of spare income could potentially choose to salary sacrifice it into super, losing $1500, and ending up with $8500 to invest in their super fund, instead of taking $5100 in the hand (49% MTR).
Or, potentially, they could buy a $400,000 investment property outside of super that will cost them, after tax, potentially around $5100.
I’m not suggesting that everyone would, but if you increased the tax rates inside super from 15% to 34% for some, then it is fair to say that a few more people are going to choose non-super investments, which offer potentially even better tax rates than super-based investments over the short and medium terms.
While there might be some upside for Treasury revenues to charging more in super taxes, there would be some downside to the amounts that are taxed at all inside super, versus those that are negatively taxed outside of super.
So, if the government was considering an increase to something resembling marginal tax rates inside super, they might also need to consider severe curbs to negative gearing.
And if you think it stops there, you’d be wrong. Other structures also have different tax rates and they would also become more appealing if super tax rates were lifted. Less directed into super would decrease taxes paid in super at all. And may, or may not, result in more or less tax being paid elsewhere.
Many people, particularly the self-employed, have a level of control over the income they pay themselves each year. If super were less appealing, same thing again.
The point is that the level of superannuation tax concessions is relative to what other tax rates are on offer through other structures. Treasury knows this. And they can model the potential consequences far better than you or I.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial. E: firstname.lastname@example.org. Bruce’s new book, Mortgages Made Easy, which includes a section on SMSF geared property investments, is available now.
- Former treasurer Peter Costello has defended the limited recourse borrowing arrangements within SMSFs. Any ban on gearing within super would not stop SMSF trustees from taking on more debt outside super, he told a function. “If you put that rule in place, you may just be shifting the gearing. You may even be shifting it into more risky areas,” he said.
- The big four banks offered small businesses inducements to switch staff default super funds to the banks’ retail funds, Fairfax Media reported. The banks engaged in “widespread systemic breaches” of the law, a survey commissioned by APRA found.