This article appeared in the June 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
How the Federal Budget affects your superannuation.
By Sam Henderson, Henderson Maxwell
I’m a real hoot at dinner parties. I can talk about taxation and superannuation until the cows come home, but most people’s eyes gloss over even at the slightest mention of superannuation. Why is it so? Has superannuation simply become too complex for the average person to comprehend, or is super just a topic for the rich who can afford to use its many "tax haven" benefits? And what’s so good about super anyway if you can’t touch it until you’re 55, 60 or even 65?
For those over 60, superannuation is a tax-free bonanza: no capital gains tax, no income tax and no tax on the earnings inside the fund. If you are retired you can even get 100 per cent of your franking credits paid back to your fund at the end of the financial year to boost your returns by another 1 per cent or more.
If you are over 55, you can set up a transition-to-retirement income stream to reduce tax and boost your savings. Also, each year you can put up to $25,000 into super and pay just 15 per cent tax on it to reduce your income tax.
You can even buy shares or property by borrowing money and use the dividends or rent to repay the debt faster and more tax effectively. In fact, in many instances, you can own your asset faster under the super regime than in your own name because of the tax benefits, and you may not pay any capital gains tax when you want to sell the asset.
The latest Budget made a few small changes to the super system. All concessional contributions will be limited to $25,000 a year from July 1 this year. Concessional contributions include 9 per cent employer’s contributions, and salary sacrifice contributions or lump sums for the self-employed. Over-50s will no longer be able to contribute $50,000 a year as a concessional contribution, making the amount $25,000 for everyone for at least the next two years, without indexation.
The Federal Government made no changes to the non-concessional contribution limits, which remain at $150,000 a year or $450,000 averaged over three years. They are your after-tax contributions to which no 15% tax is applied.
One of the positives to come out of Budget 2012 was allowing low-income earners a rebate of 100 per cent of the superannuation tax if they earn under $37,000 a year. The co-contribution will be lowered to $500 from $1000 but when combined with the rebate, the result will be similar. The co-contribution is when you contribute $1000 of your own money to super, the Government gives you $1000 (until June 30), and $500 after July 1. This is money for nothing and if you earn under $31,920 it’s a no-brainer, if you have the cash.
If you earn between $31,920 and $61,920 this financial year, you will get part of the co-contribution. From July 1 those thresholds fall but it’s still a worthwhile strategy for low-income earners to boost their super.
High-income earners slugged
High-income earners may have seen it as a Robin Hood budget. Super tax for those earning more than $300,000 will double from 15 to 30 per cent, effectively reintroducing a superannuation surcharge tax. This is just the type of tinkering that disenfranchises superannuants from the system.
The quest for a Budget surplus in 2012 has only made the superannuation system more complex to understand, more complicated and expensive to administer, and less user-friendly.
But we have seen a trend emerge of the self-managed super fund (SMSF) being the new personal savings vehicle for retirement. At the end of last financial year, the number of SMSFs swelled 34 per cent, according to the Australian Taxation Office, and around one million people have now invested retirements savings via an SMSF. These savings now exceed those in industry super and retail super funds - SMSFs now lead the $1.4-trillion superannuation industry.
Scarily, 3 per cent of the population, who are members of an SMSF, hold around 38 per cent of retirement savings in Australia. The average SMSF holds around $900,000 of assets and the average member balance is $450,000.
Many funds are being set up by professionals, like me, hired by retirees to manage their super savings. Many are simply people wanting to take better control of their retirement as a result of a loss of trust in the system. One thing is clear, members of SMSFs want to have more flexibility in how they invest. They demand more transparency, lower fees, and better service from professional advisers.
More transparency, more products
The transparency I speak of comes in several forms: direct shares, ETFs (exchange-traded funds), LICs (listed investment companies), term deposits, and property. There has been a huge movement away from expensive and poor-performing managed funds with adviser trail commissions, and wrap accounts.
In response, I have changed how I run my business and manage my clients’ accounts to reflect their needs. We now invest directly and try to skip around the managed funds industry altogether.
Interestingly, the development of the listed products available on ASX has perpetuated a move by independent-style advisers away from fund managers and into the arms of listed products such as ETFs, Listed Investment Companies, fixed interest, and hybrid securities.
ETFs can gain access to overseas shares at a cost as low as .09 per cent, instead of using an expensive international share fund that can cost 1.5-2 per cent, plus entry fees, adviser fees and wrap fees.
You can now buy the US index S&P 500 under the three-letter code IVV, on ASX. You can buy gold (hedged or unhedged) via the codes GOLD or QAU, and buy the whole ASX 300 under the code VAS or the ASX 200 under STW.
Some of the Asian market ETFs have higher fees of 0.75 per cent but they are a great way to get access to China, Korea or other regions where you wouldn’t normally invest. In America, six out of 10 of the most traded shares each day are in fact ETFs.
Clients getting more for less
The other transparency trend appearing in the past few years because of changes in legislation is adviser fees and product kickbacks. Adviser fees are moving to a fixed price model, trail commissions are being grand-fathered on old products and outlawed on new ones (managed funds and wrap platforms). Fee compression is occurring in a big way, and as a result of legislative change and poorly performing markets, clients are demanding more for less and getting it.
ASX is providing more liquid products across a wide range of offerings to meet the more advanced demands of clients and fee-for-service advisers. Even many institutions are getting on board as clients demand more for less. This is good news, and I encourage you check the ASX website to learn about ETFs, LICs, hybrids and other listed offerings for your SMSF.
About the author
Sam Henderson is CEO and Senior Financial Adviser at Henderson Maxwell. He appears on Channel 10’s The Project and The Circle, on Sky Business’s Your Money Your Call, and broadcasts on Radio 2UE. He is the author of best-selling books, Financial Planning DIY Guide and SMSF DIY Guide. He was the recipient of the Financial Planning Best Practice Award 2011.
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