Expert Advice with Todd Hunter. 18/07/2016
If you think the new superannuation laws wont affect you, then you really need to read this as they may well do.
First we must understand why superannuation is there in the first place. It was designed so that as individuals we could afford to live into our twilight years without working. Live without the support of the Government Pension. Or maybe with a part Pension. That way we wouldn’t be a burden on society when we retire. We could fund our lifestyle ourselves and still contribute to the economy through GST and general spending. Makes perfect sense right?
The reality is that the Pension cannot continue forever. It’s a mathematical impossibility. In reality, our country cannot afford it already. But no Politician has the balls to stand up and cancel it. It would be political suicide. Similar to gun control in the USA.
The current legislation states that if you earn less than $300k per annum (most of us), then you pay 15% tax within your super. For those earning over $300k, they pay 30%. The maximum you can contribute through your employer (concessional contributions) is $30k per annum or $35k if you are over 50 years old.
The proposal has reduced the income level from $300k to $250k and made the maximum super contributions level from $30k to $25k. On those numbers, that’s around a 17% drop. But reality tells another story.
So my obvious question to Scott Morrison is – how are people going to create a superannuation big enough now, so they can live until they die? And maybe give the kids a little inheritance too?
But how much do you need to live in retirement, the latest figures for 2016 state that a single person requires around $43,000 per annum. That’s $827 net per week. You wouldn’t want to have any more bills other than electricity, water and council rates. Add to that some petrol, alcohol and there isn’t much left. Baring in mind medical bills generally increase dramatically in retirement. It’s a very modest figure, that’s for sure!
Now to put that into further perspective, image that income figure in another 10 or 20 years! That’s chicken feed!
Putting that into numbers: that means that you would need $1,800,000 in an account earning 2.5% per annum to receive the $43,000 per annum.
It would take 72 years of putting away $25k away each year to accumulate $1,800,000. That’s a little hard given the usual work life is 47 years? (18 yrs – 65 yrs)
Now sure yes you would earn interest and growth on shares which should decrease that timeframe, but throw in a GFC or a recession or worse, a depression, and this becomes almost impossible.
And how many people pay the maximum into their superannuation each year? I don’t know the stats, but I am sure its well below 1%.
But it gets better; for those high-income earners, of which most have a SMSF (Self Managed Superannuation Fund) the figures are scary. And unfortunately I don’t think the government worked out these figures.
The current super environment looks like this:
$30,000 max employer contributions
$ 4,500 tax at 15%
$ 4,000 costs to hold a SMSF each year inc audit
$21,500 Net increase in balance each year
A high income earner (over $250k) who puts the maximum into their SMSF, has a fund increasing similar to this:
$25,000 employer contributions in their SMSF
$ 7,500 tax at 30%
$ 4,000 costs to hold a SMSF each year inc audit
$13,500 Net increase in balance per annum
That’s a 37% decrease!
The crazy part of this is that on the above figures numbers, a person earning an income of $140,000 per annum is increasing their fund also by $13,500.
Again please explain how this makes sense?
Oh, but it keeps getting better, your income is not calculated by your net salary, not your gross income, but it also includes your superannuation into the $250k cap. Not only that but it also includes rent you receive from investment properties you own plus they also add back the negative gearing benefits you receive. WTF?
Now this example is not uncommon. In fact it’s quite common in Sydney and Melbourne. An executive worker in Sydney earns $140,000 plus super of $13,300. They rent close to the city as they cannot afford to buy a home there but instead they invest in properties around Australia. They own 4 investment properties each worth approx $500k each. Those houses receive $500 each per week. That puts their income to $257,300 and over the new cap. And therefore his superannuation will be taxed at 30%.
$13,300 x 30% = $3,990 tax = $9,310 net super
Now being one who is a little skeptical, once a law has been changed, then amendments to that law are much easier to get through and often go under the radar. Meaning once we have this approved then reducing the income cap limit can easily lowered to $150k and then $100k. Then many more would be paying 30% in super.
The new legislation has also affected the amount of money you can put into super post tax (Non Concessional Contributions NCC). This now has a cap of $500k. Where this comes into play is when you decide to downsize your home and move into cheaper property. You do this so you can put the extra money into your super so that you pay little or no tax when you retire. So this would be hard for a couple to go over this amount as they could put in $500k NCC each. But as it often happens, your partner could pass away before you do this and then you would be over this threshold very quickly.
And should your overall super balance go over the $1,600,000 mark, then you are going to be taxed again. But to earn enough interest on your super to earn to basic income to be able to live on was $1.8 million. Now part of this will be taxed, so in fact you need more than $1.8 million. More like $2 million. Are you starting to get my drift on wHere this heading?
The idea of stashing cash in a safe in your backyard is starting to look very attractive to me!
I must say that this the first time that I have ever thought of not planning ahead for my own retirement as I will be paying as much tax as when I was working! And who knows if I will even make it to retirement.
And it would appear we don’t have politicians with the balls to simply STOP spending to repay the debt as this doesn’t win votes. Instead they increase taxes to try and repay the debt.
Now moving on to more concerning angles to this new legislation. Many investors purchased commercial properties within their SMSF either for investment or to run their own business from. Unlike residential SMSF loans, commercial loans are a lot tougher to service and have much shorter loan terms. This makes servicing the debt much harder, so the lenders can also take into consideration an applicants ability to be able to contribute more into their super (within the limits) if they had the capacity to service the debt outside of super. Meaning if they were not putting in the maximum contributions but then they had a tenant vacate and they needed to add in more into super, then they could, to survive. Many investors have also maxed their borrowing capacity when purchasing their commercial property, as the banks servicing benchmarks are very tough.
Most of these loans were written as 5 years interest only with then a 10 or 15 year principle and interest loan to follow. What that means is that when the interest only term expires they now must repay the entire loan in ten or 15 years. Meaning their repayments skyrocket. As an example a SMSF commercial loan of $400k would be approx. $1,796 per month interest only. If this then reverts to a $3,245 repayment over 15 principle and interest and then a whopping $4,319 over ten years. That’s well over double.
Now that wouldn’t have been a problem as the lender has serviced the loan on these parameters, with the borrowers being able to put in the extra super contributions as required. The problem being that now the maximum they can contribute has decreased by 17%.
So through no fault of their own they may now not be able to make the loan repayments when the loans covert to principle and interest and potentially lose their property and/or their entire superannuation if the bank takes their property. Especially if the bank sells the property much cheaper than market value to simply clear the debt. And they can do that if there are no buyers at the time of sale.
And unlike residential loans, the SMSF commercial loans are very expensive to refinance. And if there is not the available equity to do so, they may have their hands tied here too. Meaning they may not be able to refinance to another lender and get another interest only period.
Now I’m no lawyer, but I see potential litigation bells ringing here against the government.
The same could happen with residential properties but to a far lesser degree.
Messing with superannuation must take on careful and well thought out thinking. After all you are potentially changing peoples futures and they don’t take that too lightly. And in this instance I definitely feel we have been knee capped.
Normally I write a solution to the problem, but in this instance there is literally no point. The legislation has been put forward. What I can add though is that the majority of people who are affected by this legislation are generally the Top 1%ers of highest income earners in Australia. The same people who contribute approx. 39% of all tax collected. I believe that if you tax the wealthy to breaking point, then they also have the capacity, knowledge and ability to shift funds and bend rules and take their cash elsewhere. They’re not the Top 1% for nothing!
Now as this is a Blog about Superannuation I must add a quick Disclaimer. No part of this Blog was or is intended as financial advice and is general in nature. All care was taken with the figures but please do you own due diligence before making financial decisions. Those looking for financial advice should seek the services of a professional financial advisor.
Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup. He is an active property investor himself and amassed a portfolio of 50 properties by the age of 31. For more of Todd's musings, visit the wHeregroup blog.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.