Superannuation - Best types of assets to hold

After the recent changes to super which I still don't fully understand how certain types of scenarios work. I would like to discuss if it would be advantageous to hold certain types of assets inside super. By that I mean higher income producing assets.

Based on my understanding you can have maximum of $1.6 million per person into retirement/pension phase where earnings are tax free. Anything above needs to be in accumulation phase where earnings are taxed at 15%.

If you bought high income producing assets like Australian shares into your super then at 5.5% gross (including franking) income on $1.6 million can generate $88,000 tax free income. On the other hand say you buy international shares or property that generates 3% income after costs the $1.6 million will generate only $48,000 income tax free.

This is my understanding anyway but would like to get opinions of people with more knowledge on this subject. May be @Terry_w and/or @austing can elaborate.

Cheers,
Oracle.

 

International shares have a foreign tax credit attached to them.

The foreign tax credit cannot be refunded to an entity if it does not pay tax (like a SMSF in pension phase). You will only enjoy a refund of Australian tax paid.

So one strategy is for international shares to be owned in an individual, or trust name, where the foreign tax credit can be enjoyed.

Some disregard the foreign tax credit on the grounds that they are chasing the capital growth tax free in the SMSF pension phase.

A financial product advisor must consider, and give, tax advice when looking at the structuring of a portfolio in a SMSF.

 

Very good point about foreign tax credit cannot be claimed if you do not pay tax to ATO.

Do you agree with my understanding of the new super rules in retirement phase based on the above example I gave where you could have $88K vs $48K (let's assume Australian property) income tax free?

Cheers,
Oracle.

 

Also remember that you must draw down increasingly larger amounts of capital as you age, income is but one consideration.

 

Yes. A $1.6m super fund in pension phase generating $48,000 of foreign income will generate that income free of tax.
A $1.6m super fund in pension phase generating $88,000 of Australian income (including credits) will generate that income free of tax.

There are rules about the valuation and so forth and implementation is more tricky. But the theory you are suggesting is correct.

 

Yes very important point and one I've being thinking about lately. So if SMSF members want to avoid selling assets for as long as possible perhaps this is where the higher yielding assets are best held. Aussie dividend focused shares, franking credits, funds using options strategies etc.

But I like having a diversified portfolio so perhaps outside the SMSF lower yielding International share funds might be worth considering. I still like my franking credits in own name so unlike some I'm not a total indexer for International and quite happy to hold LICs also.

Sorry very rushed reply as another big day in the garden and having a quick lunch break but a few thoughts. Would also be keen to hear other's thoughts.

 

@oracle I'm assuming you know this but just in case the $1.6 mil limit only applies to when you commence a tax free account based Pension. It might grow to three million or more overtime after commencement of the pension. So don't just think of it as $1.6 mil but that initial amount PLUS GROWTH.

Of course there is a mandatory minimum pension withdrawal percentage but if you choose high yielding assets then there'll be enough to meet pension payment and surplus to reinvest especially earlier on.

You may choose to retire and access Super at 60, draw the minimum 4% Super pension but recontribute $25k back into Accumulation (if pension maxed out). Can do this till 65 or later if you meet the work test. Don't forget about Super Accumulation which has no limit. 15% tax rate and ability to access it anytime after reaching preservation age and retired is still a damn low tax rate. Especially if you own a decent amount of assets also in your own name / trust etc.

 

Hehe, such a hard decision for some. A 65 yo, with $1.6m in super, has a $80,000 account-based TAX FREE income. A tough life choice to be made there.

 

Once you retire and you get your super available to you, are you saying you can't just leave the capital alone and live off the dividends, tax free? Then leave the capital to your children for them to inherit?


-Frank

 

@Frank Manno - that's right. Anything left to your non-dependent kids gets taxed.

 

@Frank Manno , in a general sense, no. Superannuation was originally intened to be consumed in retirement which, in theory, also requires capital to be used. That's one of the reasons why the minimum drawdown increases over time. It was expected that superannuation was only one aspect of funding to provide a retirement income. The other two were private savings and the age pension. It'd be useful, if you wish to, to go and research the history of retirement funding. Ken Henry, former head of Treasury, wrote an intersting paper which, in part, canvassed this.

However, as with all things designed with good intentions, it became debauched with various Governments doing all things political with superannuation. As well, as some, using legal loopholes, turned superannuation as a part of estate planning. I remember well when the Howard Government allowed a one off $1M contribuion and introduced the Tax Free account-based pension for 60+ yo.

Example of current situation. If you are a fortunate enough to have say, $2.6M in super, "only" $1.6M of it attracts the Tax Free account-based pension (that's $80k @5% if you're over 60 - and that equates to about $110k for a wage earner) and the other $1M can remain in super attracting a15% tax on earnings and 10% CGT. However, I understand there is no requirement to take that $1M out of super. So as $1.6M with the minimum drawdown each year shouls last about 40 years, yeah, some people will probably be able to pass super money on to their decendants.

Seem complicated? It is.

 

• The government tells you how much super to put in and when. If you save too much you will be penalised.
• The government tells you when you can access your super.
• The government tells you how much super you have to take out. If you don't take out enough, you will be penalised.

Under 65 4%
65 to 74 5%
75 to 79 6%
80 to 84 7%
85 to 89 9%
90 to 94 11%
Aged 95 or older 14%

Imagine having to draw down 11% of your super every year? I guess most people don't plan to live to 100 though.

Minimum pension payments for 2017/2018 year (and for 2016/2017 year)

 

Ok so minimum drawdown yearly of capital. Understood.

But the portfolio would still be earning dividends. This would add to the capital wouldn't it, so long as the tax on the dividends are paid?

Can't it end up being a case where you're reducing capital but putting it back via dividends, therefore not reducing the capital?

What happens with the dividends that a super fund earns once 9capital starts being drawn?

Why does this govn't have to make sure that they make it as difficult as possible for anyone to get ahead financially? They should be rewarding us not penalising us.


-Frank

 

Rates to be drawn down from super pension account.

 

As for your decendants, don't worry about them too much. They are going to get something and probably didn't contribute on cent of their money to purchasing your assets. If they get $500k instead of, say, $600k because of tax, tough. They are getting more than zero and never worked to get those funds.

 

Yeah thats fine.. So long as they get a good size chunk of whats left. I do want to leave them as much money as possible, but not to the extent where I have to sacrifice by not drawing down enough to live comfortably.


-Frank

 

Agreed. And you dependents are probably getting a share of your home.

Apply a recycling strategy to reduce the tax payable on your death - but remember that if you give the kids too much you will stuff them up.

Maybe you are better to pay for the kids to go financial education courses now so they will know how to deal with the inheritance.

And their is nothing wrong with investing outside of super. You can still earn nearly 40k as a couple tax free.

 

Most importantly: no doubt the rules will change many more times before we are able to access super.

 

You have to draw it down but you don't have to spend it all. Can keep it in the bank.

 

Or give it away whilst you're still warm.