All the changes to the superannuation landscape in the recent past are but a prelude to the big year that 2008 promises to be. With so much at stake, you will need to take practical steps. By MICHAEL LAURENCE.
By Michael Laurence
The changing economic landscape, as well as the new Government, signal that the fortunes of your superannuation will need your close attention over 2008.
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Australia’s super savings will multiply by almost three times over the next 15 years to reach a heavyweight $3.2 trillion-plus (in today’s dollars), forecasts actuary and superannuation consultant Rice Warner in the latest edition of its highly respected Superannuation Market Projects Report.
Rice Warner expects that the shakeup of the super regime from July 2007 – introducing the carrot of tax-free super benefits from age 60 – will make the mountain of super money a remarkable 60% bigger than it otherwise would have been.
This free-flow of money into super, along with recent amendments to super law that allow self-managed funds to borrow to invest, present plenty of opportunities and pitfalls that should become increasingly apparent over the 12 months ahead.
Here are six super tips, and traps, for 2008 and beyond:
1. Borrow to invest only with extreme caution: One of the most heavily promoted self-managed fund strategies of 2008 will be to borrow to invest. This strategy is already becoming red hot.
From September 2007, self-managed funds have been allowed to borrow to invest – provided stringent conditions are met. This is despite the long-standing, and remaining, general prohibition on borrowing by self-managed funds to acquire investments. (The new borrowing provisions should be viewed as an exception to the no-borrowing rule.)
In the event of a default on loan instalments, a lender’s recourse against the super fund is limited to the asset that was being acquired with the loan. This condition may, however, give some super fund trustees a false sense of security.
For instance, a fund will typically contribute a large amount of its existing cash as a deposit for a geared investment, and members may agree to go personal guarantor for their super fund’s investment loan.
The result is that much of a member’s super and non-super savings could be at risk – including any amounts paid by a fund as a deposit, and in interest and fees involving the loan, which could be lost to the point of a default.
A default may occur if, for example, the value of the geared asset significantly falls and fund trustees expect that it is unlikely to recover.
For a brief rundown on the stringent conditions under the recent amendments, see the tax office’s coverage here.
2. Don’t overlook appropriate opportunities from the new borrow-to-invest rules: While super funds should only borrow with utmost caution – as discussed in point one – don’t dismiss the strategy out of hand.
SME owners might, for example, want to borrow to buy their business premises. And this might make much sense, depending upon the circumstances of the members and any professional advice received.
For a detailed look at the implications for a self-managed fund owning the premises of the members’ businesses, see Wealth/Super, 6 February 2007.
Many specialist self-managed fund advisers warn about possible increased risks and difficulties if a fund’s investment portfolio is dominated by a single valuable asset such as a factory or shop. If that asset fails to provide an adequate return, the retirement well being of the members can be jeopardised. Also property can be difficult to readily sell for an adequate price to pay member retirement or death benefits.
Obtain quality professional advice from a truly independent person before arranging for your fund to buy your business premises.
3. If you are 55-plus, consider a pre-retirement super pension while simultaneously maximising your salary-sacrificed super contributions: Alongside gearing by self-managed funds, the other red-hot super strategy of 2008 will be taking full advantage of pre-retirement or transition-to-retirement pensions in this way.
This strategy, when correctly exercised, could save eligible members and their super funds tens of thousands of dollars a year in tax – depending on the size of their employment incomes and the size of their super balances used to support the payment of the pension.
But again, take extreme care and get professional advice. This can be a real minefield.
In short, the strategy involves exchanging at least some of your employment income for superannuation pension, and potentially reaping big tax rewards along the way.
There are three tax benefits from taking a pre-retirement pension while simultaneously salary-sacrificing as much into super as possible – apart from increasing your concessionally-taxed super savings.
Salary-sacrificed contributions (or other contributions for which tax-deductions are claimed) into superannuation are subject to the standard 15% super contributions tax instead of marginal rates, if taken as cash salary.
The taxable proportion of the pre-retirement pension is taxable at marginal rates with a tax rebate of up to 15% until the member reaches 60, when the pension becomes tax-free.
The assets of a super fund that support the payment of a superannuation pension, including a pre-retirement pension, are exempt from income and capital gains tax.
4. Don’t rush to establish a self-managed fund: Ask yourself whether your needs can be met with a large public-offer fund with solid past performance, low fees, and low-cost and appropriate insurance.
The tax office, as regulator of self-managed super, says large numbers of self-managed funds are still being set up each month – but at a slower rate than in the weeks leading up to the arrival of the new super system.
A self-managed fund can provide members with high levels of control over their retirement savings; potentially lower fees, depending upon the fund balance and the strategies adopted; and valuable tax savings if skillfully managed. But only establish a self-managed fund if you are aware of what’s involved.
After some consideration, you may conclude that your time is better spent concentrating on the development of your business opportunities – much depends on personal circumstances.
If you decide, however, to establish your own fund, seek professional advice about the setting of an investment strategy; allocation of the portfolio between the various asset classes such as shares, property and interest-earning investments; and about the rigorous legal rules governing transactions by a fund. Also, it is hard to beat the services of a professional self-managed fund administrator to deal with the donkey work.
5. Look for smart ways to contribute money to super: Without doubt, many fund members now will be thinking about ways to raise more money to contribute.
Don’t just think of the big-ticket items – such as contributing listed shares, real estate or at least some the proceeds from the sale of a small business. Think small as well.
Some salary-sacrifice specialists, for instance, have already noticed a trend for a number of people with salary-packaged cars to downgrade to less costly models when their vehicle leases expire. The aim is to contribute the money saved to super.
Another straightforward strategy is to convince lower-earning members of your family to make some after-tax (known as non-concessional) contributions. If eligible, Government co-contributions will be paid into their super funds. A vital development is that Government co-contributions are now extended to the self-employed.
6. Understand the risks of your self-managed fund investing in high-risk, interest-paying products: This should be one of the big lessons of 2006 and 2007 with the collapses of the Westpoint property group and Australian Capital Reserve – to name just two.
Really watch out for products that are aggressively promoted, offering yields way above bank term-deposit rates.
As the Australian Securities & Investments Commission (ASIC) says: “High-yield debentures are typically a risky investment and there is no guarantee that investors will get their money back.” (Read ASIC’s warnings on interest-rate products boasting extra-high returns.)