Dividends or Growth stocks in SMSF?

Situation

I got good 20 years to reach preservation age and SMSF balance is $350k only. I have apportioned money across passive index funds and individual stocks. Have good results with both. Top income tax bracket.

Goal

Goal is to grow super kitty to max possible and I might consider buying property within SMSF later.

Questions

I came across an article which suggested to invest in high growth US stocks outside super and high dividends Australian stocks within super for high income earners (top tax bracket) due to fully franked dividends. Buy and hold strategy.

Should I continue investing in US growth stocks in super or switch to high dividends Australian stock and ETFs? What are pros and cons?

 

A common school of thought is to hold the highest yielding assets in the tax advantaged superannuation environment.

To truly optimise asset location you to know
- The magnitude of future returns
- The characteristics of future returns (interest/dividend/capital gain)
- Future tax rates

Historically you would hold bonds in superannuation, however with low bond yields currently, this seems suboptimal.

Future regulations around franking credits, discounted capital gains etc can also change the optimal asset location.

One argument for holding growth assets in super is that on conversion to pension, all deferred capital gains (over 30+ years) are wiped.

Personally, I just mirror my equities portfolios inside and outside of super 20/80 Australia/International and don't hold any bonds. All cash in an offset account outside of super.

Ben Felix makes the same recommendation

 

Make sense ~! My correct thinking is to continue investing for growth (US stocks/ ETFs) in SMSF and may be switch to high dividend AUS stocks in pension phase (after CGT free sale)

 

That's one option.

Under current rules, you can get a refund on franking credits bringing your tax to zero in pension phase. International stocks on the other hand will have tax withheld that you can offset local taxes but no refund to zero. So US for example, 15% tax on a 2% yield = 0.30% cost of diversification vs single country risk.

Now I would never go 100% Australian equities but I might consider a shifting from a 20% to 40% weighting saving 6 basis points which seems hardly worth it for the lower level of diversification.

Also beware if you exceed the transfer balance cap, you cannot segregate assets and will still have to pay 15% tax on anything remaining in accumulation mode and pay capital gains tax when selling down to convert from International to Australian equities.

 

The Video is totally irrelevant, different country very different tax system. In a retirement account no taxes are paid , in Pension phase tax is paid. You can have a tax free savings account up to a theshold. There is also a large tax free threshold for dividends in a taxable account . He is saying foregein companies with with holding tax should be held here. only 50% of CG is taxed at marginal rate.

 

If you have 350k in a Super in a high growth shares you shouldnt need to make further contributions as in 20 years time you should have more than the taxed advantaged limit. Best to hold your dividend paying shares outside super and use it to help acess other peoples money to fund your Super and fund tax effective and liquid funds .

 

Sure, there are parts of the video that are specific to the Canadian market (TFSA etc), but I would still suggest the core concepts of being unable to know the following in advance still have relevance to asset location strategies.
- The magnitude of future returns
- The characteristics of future returns (interest/dividend/capital gain)
- Future tax rates

 

If you are maxing out concessional contributions and achieve a 5% annual return before inflation, yes.

=FV(5%,20,-27500*85%,-350000)
=1.7M

 

Thank you both for your response.

Our employer is already contributing $25k per annum. Both for myself and wife.We are not planning to make additional contributions on top of it. We pay divisional 293 tax as well.

What you do you mean by Tax advantageous position ? If super balance is more than $1.7mil - does pension or excess money get taxed using normal MTR brackets ?

 

No, anything above the transfer balance cap stays in accumulation mode and is taxed at 15%. Personally I plan to get to the cap as quickly as I can (likely by age 50) so I can benefit from low 15% tax accumulation on the remainder all through retirement.

 

In 20 years $1.7m may buy a 1 bed studio and it may cost $150K pa to survive.
Think back to 2000. A bottle of Mt Franklins water at the Sydney Olympics was the extortinate price of $2 unheard of then. Now ?

$100 of buying power in 2000 now buys $60 on average. If we invert that the $1.7m may be worth $1m

Planning to meet the $1.7m tax effective cap is actually incorrect. First it is indexed so it will rise. Secondly, I would be very very happy for my smsf to have $3m of benefits in 20 years so that half is subject to tax. At 15%, or 10% for capital gains.

 

No. The fund rate applies. That is 10-15%.

 

Both myself and wife pay div 293 due to high income. Does it make CGT within super 30%?

 

No, div 293 only applies to concessional contributions. Income and discounted capital gains within the fund remains at 15% and 10% respectively regardless if your income outside of super.

 

Div 293 applies to the individuals income and is assessed to the individual. Any superfund is uninvolved except if the individual requests a release authority. Then the fund may merely deduct this from the member account and pay it. Then the fund merely treats it as a outgoing for that member. It doesnt impact tax calcs in the fund.