LARGE SUPER BALANCES – WHAT DO THE CHANGES REALLY MEAN?
We have had a lot of comments from clients and friends that are upset regarding the recent changes to superannuation. The main area of concern that we are hearing about is the fact that the Australian Government, led by John Howard, encouraged individuals to build up their superannuation balance in order to self fund their retirement, and hence, reduce the burden the ageing population of Australia was going to place on the economy, and now the Government see these large super balances and think they can start to tax them to bring the budget back into surplus. A fair argument, but is it really that bad?
The Australian Financial Review (AFR) published an article on 13/5 revealing how to pay no tax on $7 million of savings, see here (you will need a subscription). Quite a headline, is it true? Not quite, but close. Let’s explore this further.
Each super fund member can retire with a tax free balance inside super of $1.6 million each.
They can then establish a Family Trust, hold $2,200,000 in the trust and earn $88,000 in income (4% return), contribute $50,000 into super ($25,000 each) to reduce their taxable income’s below the tax free threshold and pay approximately $7,500 in combined tax (15% tax on the super contributions). This is even without taking into consideration Low income and Senior and pensioner tax offsets (which could increase this balance to $2,700,000 with only $7,500 in tax).
The remaining balance of $1,600,000 will sit inside Super and will attract a tax of $9,600 assuming a 4% income stream equal to $64,000 per year.
In summary, you could have an investment portfolio of $7,000,000, it will pay you a $280,000 income stream and pay only $17,100 in tax, an effective tax rate of only 6.11%. That is the basically the same amount of tax someone earning $78,000 per year is paying.
Not too bad to me.