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Superannuation
The super dilemma
Nick Renton AM - April 2007
There are many investment seminars being conducted at the present moment to deal with selling property to put into superannuation before 30 June 2007, but bear in mind that these are usually run by entrepreneurs with a vested interest in selling superannuation plans and other services of various sorts to investors, in order to earn both one-off and ongoing fee income from these clients. Any advice given in such forums is thus likely to be tainted by significant conflicts of interest.
30 June 2007 is not an absolute cut-off date for making undeducted contributions into superannuation - it is just the cut-off date for certain admittedly generous transitional arrangements. Subject to any applicable work test, people can make up to $1 million of post-tax contributions to superannuation funds until 30 June 2007. A new $150,000 annual limit on post-tax contributions will then apply from 1 July 2007. However, persons aged less than 65 will be able to bring forward two years’ worth of contributions, enabling $450,000 to be contributed in any one financial year, with no further contributions then being allowed in the next two years.
There is one undoubted advantage of putting the sales proceeds from existing share and property investments into a superannuation fund, namely, that in future all fund income will be taxed at 15 per cent, rather than at the investor’s higher marginal income tax rate outside superannuation. Such an approach can make considerable sense for someone with 20 or more years’ worth of compound interest before retirement; it is much less useful for somebody with only two years to go to retirement.
One significant disadvantage in practice is the capital gains tax which will be incurred when assets which have been held for a long time are disposed of, in order to get money which can be paid into a superannuation fund. With the market at around an all-time peak at the moment most people quitting shares and property would incur large capital gains tax bills. Another disadvantage is the cost involved in setting up a “do it yourself” (DIY) superannuation fund - which is probably what some of those running the investment seminars are suggesting.
If, on the other hand, the use of publicly available managed funds is being recommended, then the investors can finish up with a worse performance after fees than if they had stayed put - they will, for example, miss out on any future takeover offers for the shares which they disposed of. Also, bear in mind that approximately half of all managed funds underperform the index.
Selling one’s own family home raises different issues. It is true that no capital gains tax would be incurred on such a disposal, but there are still considerable expenses involved, such as agent’s commission, advertising costs, legal fees and removal costs.
Furthermore, where are the people who have sold their own homes going to live, possibly for the rest of their lives - in rented accommodation? Or will they purchase a replacement home with borrowed money, incurring stamp duty and legal fees at the start and non-deductible interest for many years after that? Renting premises could involve you in hassles with landlords and would not provide you with security of tenure at the time of your life when those aspects are becoming particularly important. There is naturally also the likelihood of periodical increases in that rent. Furthermore, all such rent would be non-deductible for income tax purposes, being regarded as a domestic expenditure.
When looking at the all alternatives it is therefore necessary to compare the expected after-tax income stream from superannuation with the gross cost of the future rent or interest instalments.
Whatever your views, you can discuss this article - or any of Nick's articles - on our message board Your 2 Cents.
Nick Renton AM is the founder and first president of the Australian Shareholders' Association. He is a consulting actuary, commercial arbitrator, company director and writer. He is the author of 62 published books covering shares, property, managed investments, taxation, wills, the Internet and the Australian economy. He has written books about more different topics than any other Australian author. He was made a Member of the Order of Australia in 2004.
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