Superannuation is back in the news, with media "revelations" last week that some self-managed funds have very large assets - in some cases, over $100 million.
It's old news, but attracts an outcry from the usual suspects, who want to see superannuation concessions drastically reduced.
But how can this given that tight limits on contributions were introduced 15 years ago.
Remember that the main 2006 superannuation reforms were based on the same thinking that introduced deeming for pensioners: encouraging people to get the best possible return on their investments.
By moving from controlling how much a superannuation fund could have in total, to limiting contributions, the government is encouraging people to get engaged with their super and invest it well to create a substantial balance.
I sought input from a friend who has spent most of his career advising high net worth individuals. He pointed out that before 2006 there was no limit to the amount that could be placed in superannuation, and some extremely wealthy people loaded up their funds.
According to my friend, the few big funds that are around today have been in existence for many years, and the trustees are usually an elderly couple who have had the benefit of time working for them.
A good asset acquired by the super fund in 1975 for $500,000 would now be worth $26 million if growth and retained earnings averaged 9 per cent per annum. That's the power of compounding.
But these enormous funds are not here for the long term. When the trustees die, which may well be within 10 years, the most that can be left to the surviving spouse within the superannuation system will be approximately $1.7 million.
And their tax bill will be huge: the taxable component of superannuation - which includes all the capital gain and ongoing earnings - suffers a death tax of 17 per cent if left to a non-dependent. In a $100 million fund this could well mean paying tax of $17 million.
There are also a few much younger funds where the trustees are either extremely smart or extremely lucky. If a super fund had invested $1 million in 339,000 Afterpay shares in June 2017 they would now have a portfolio worth $36 million.
But these are rare examples. The old legacy funds will almost all be closed down within 10 years as the trustees die, and very few fund trustees have the skill or the luck to make the plays I mentioned above.
And remember, you don't even need to resort to superannuation to save tax. Think about Bill and Mary, both aged 75, who sold their property for $6 million to retire to the city.
They bought a house for $2 million, stuck $500,000 in the bank for living expenses and invested the balance of $3.5 million into an index fund. To keep it simple we'll say the portfolio yields 4 per cent per annum income and 4 per cent capital growth.
The income would be $140,000 a year and, if it's mainly franked, would include $50,000 of franking credits. This would produce a taxable income of $190,000 a year, which would be split 50-50, as the investors are a couple.
This means $95,000 a year would be added to each of Bill and Mary's taxable incomes, but they would also each receive $25,000 of franking credits.
The tax on a total income of $95,000 a year would be $22,000 each and the franking credits of $25,000 each would eliminate all tax on the income from the investment as well as the income from the bank deposits.
As well as income, the portfolio has produced capital growth of $140,000 a year, on which no capital gains tax is payable until the shares are sold.
So to sum up, a $3.5 million portfolio of Australian shares paying franked dividends should total a tax-free return of $280,000 a year.
It sure beats leaving your money in the bank, and you don't need superannuation to do it.
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Noel answers your money questions
We are elderly parents with our own SMSF. We are not on the pension. Our adult son earns a very small annual income and has less than $75,000 in his super. Are we allowed to gift him some money for him to top up his super?
A person can make gifts without limit in Australia, and there is no gift duty.
However, if you are an age pensioner any gifts in excess of $10,000 a year or $30,000 in five years will be treated as a deprived asset and depending on your overall asset and income position could affect pension eligibility.
You say you don't receive any pension, which means you can give to your son whatever you wish without any adverse effects on your finance.
I am 21 years old and have a dream to own a property. I want to start thinking about investing my money somehow.
I've worked out that on my salary that I could probably afford repayments of around $1200 a month. I have looked at home loans, but with what I am earning I cant borrow enough money to afford anything. I have got $26,000 sitting in a high interest account but I am not sure what to do from here.
What would be your advice for an investment that would give me the best return on my money?
If you are prepared to take a long term view, and won't panic when the stock market has one of its normal bad days, you could consider a margin loan for a quality share trust. Your money will be spread over a range of blue chip companies and you can start small.
Also, you will get a tax advantage as part of the income stream will be franked and you can add to your investment on a regular basis by reinvesting dividends or by making further contributions. If you seek advice and adopt a conservative loan to valuation ratio you should do well.
My wife and I are ready to upgrade our home. We have only $5000 remaining on our current mortgage, with the home valued at $900,000 and rental potential of $875 per week. I'm unsure if we should sell our existing home to purchase the new home, or refinance the existing home and make it an investment property. What are the capital gains implications of the latter option?
If you keep the home and rent it out, the deductible interest will be limited to that payable on the existing mortgage. You cannot increase the tax deductibility by mortgaging that property to buy your residence. Once you leave that property you will be liable for capital gains tax on any increase in value from that date.
It is possible, however, to return to that property in the future and claim the six year absence CGT exemption, but, if you did this, the new property would be subject to CGT. This is because you can't have two principal places of residence at the same time. Make sure you liaise closely with your accountant.
I have been trying to find out the situation in relation to Capital Gains Tax on a property in a deceased estate. I am aware that a property must be sold within two years but am not sure if this is from the date of my mums' death or from probate. I lost my dad and then my mum shortly after Covid hit us.
With borders opening and closing it has been difficult getting everything done. If it takes longer than I expect to sell the property, who should I contact to ask for an extension of time regarding CGT.
I have tried researching online and have called NSW legal services but have been unable to find out who I contact to request a possible extension.
Julia Hartman of Bantacs says that CGT applies from Mother's date of death, not the date of probate but you can apply to the ATO for an extension of the two years due to COVID.
You have at least two years in which to sell the deceased home, from date of death without attracting a CGT liability, but note that this is the period of ownership.
Therefore the applicable date is the date of settlement not the date of contract. During the "two years" the property can be rented out without interfering with the full concession and if there are problems leading to settlement you may be able to extend the two years.
This two year period can be extended at the ATO's discretion when there are delays beyond the control of the executor.
Examples of this is when the will is challenged or probate is delayed. It certainly does not cover extra time to do the property up to get the best price.
The delay must not be a choice. It would not be surprising if COVID shutting down auctions and limiting house inspections will be considered justification for extending the two year period.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: email@example.com