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Chapter 1: Is superannuation still the winner after the Budget changes?
Hello and welcome to the Australian's Money Puzzle Podcast. I'm James Kirby. Welcome aboard, everybody. So, look, a major question. Really, here we are, one month or so after the budget. Did super, as we have said on the show, or we thought at least... Did super win? Was super the big winner?
Did it escape, basically, the worst of this budget, this increasingly unpopular budget, which keeps changing on us as the government backflips and does little nip and tucks, more nips than tucks, as you know, and they just, of course, quite controversially terminated SMSF lending, which we dealt briefly with on the show on Tuesday.
I want to take a look at these residual issues from the budget today. And specifically, let's just take a look at that about super. Where do we stand? Because I know everyone listening to the show would be an active super investor. And I think you'll find it pretty interesting where this is going to go.
I also just want to like on Tuesday coming, we will have a special listener questions episode. We have these every now and again. It'll be just on property for you. It's with me and with Stuart Weems, no better man to do this with us. And if you have questions, you've got a couple of days, send them in, themoneypuzzleattheaustralian.com.au.
Okay, now my guest today is James Wrigley from First Financial. How are you, James?
Hi, James. Yeah, I'm going well. Thank you for having me on. What an interesting time with this budget, that's for sure.
It's a lively time. I don't have to be thinking up issues and questions for you. All I have to do is try and select the most appropriate and relevant questions because there are so many issues. Suddenly, I think about the period where the financial and wealth management world and the investment world spent, you know, weeks and weeks obsessing about Division 296. One, you know,
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Chapter 2: What are the implications of the new super tax on investors?
quite pointed, targeted twist on super. And now we have like basically the kitchen sink, I should say, was thrown by the treasurer at the issue of reform. And he has, if nothing else, he has been ambitious. So look, on super, straight up, is it still the winner?
Absolutely. Without a doubt.
Yeah. Okay. And that will be in relative terms. That is, it loses less.
Yes, that's it. And so whether by design, in the conversations I've been having with clients in the week since, whether it's by design or by accident, who knows, but it's kind of everything else has taken a step back in its relative attractiveness because super has broadly been left untouched. Contribution limits stay the same, albeit they're kind of being indexed up from the 1st of July.
Access, tax rates, all of these kind of things, they all stay the same. So there was no significant changes to the super system. But everything else has kind of taken a step backwards. Capital gains tax increasing, negative gearing changing, all the rest of it. And so super then becomes that much more attractive. It was already attractive, but it's even more attractive, I think, in the new world.
So just to interrogate that for a moment for listeners. So on the CGT, could you explain why super escaped?
Yeah, so super pays a headline tax rate on income earned in the fund, 15%. And depending on the type of super fund that you're using, your super fund might be individually taxed and you actually notice that tax bill being paid.
You might be in one of the big super fund providers or it's more of a unitized product and that tax is effectively kind of taken from your investment earnings, but nevertheless, it's being taken. So super fund in the accumulation phase will pay a 15% rate of tax on earnings. But for capital gains for assets that have been owned for more than a year, there's a one-third discount on that.
So the effective tax rate on a capital gain for an asset that's been owned for more than a year becomes 10%. Those rates were already fairly low relative to our marginal tax rate system anyway. But when we now enter a world where
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Chapter 3: How can SMSF investors still borrow to buy property?
And it gets even better when you're in the pension phase, when you're starting to draw down on your money, subject to that transfer balance cap of what will be $2.1 million, you end up in tax-free earnings.
Yeah. I mean, if you're retired already, you're in the zero tax zone anyway, unless you will assume if you're under two million and if you're over two million, you are dealt with separately. But what's extraordinary, I suppose, as you say, James, is the CGT rate, the capital gains tax rate that you pay in super on the sale of an asset. shares, property, doesn't matter.
It works out at 10% straight up. And if you don't hold it in super, it's going to be 30% rock bottom minimum or higher. Is that basically it now?
Yeah, the difference being the asset that's outside of super, the cost base will be indexed with inflation. So your asset inside of super is not being indexed with inflation. It's just this flat 10%. But the asset outside of super will be indexed with inflation. So the only way that you...
The only way that you would pay less tax in your own name is if your investment wasn't terribly good in the first place, that it was only just going up with inflation. So if it's only just going up with inflation or slightly more, then the 30% tax rate of something that hasn't really gone up in value is zero.
Whereas that same asset, if it was in your super fund, only earning an inflation-type return, well, you're going to still have your 10% tax to pay. But assuming it's a half-decent investment that's generating a return over and above inflation, you're better in the super world than outside.
Like most people most of the time. Exactly. They're not going to lose, particularly if they listen to our show. Okay, now, the other thing, folks, at the risk of repeating myself, the way it worked previously ā
when you, outside super, when you sold an asset, and you had made a capital gain, for most people, works out at about 25%, okay, because your tax rate was effectively 50, and then that was cut in half to 25, if you think about it. And now, we're talking 30, 35, 40%, entirely possible.
on these on cgt outside super so that is the essence of it as to why super has suddenly become and will stay and there is no talk of change on this and there's no speculation of change on this and i would say anything else was speculated by the way including the smsf lending I mean, we had people on the show telling me to be quiet.
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Chapter 4: What are the benefits of investment bonds post-Budget?
I don't know that they're relatively better than ever. I think over the last five to 10 years, certainly the last five, there has been a lot of advancement in the alternatives. So you'd really got to look at why are you setting up a self-managed super fund. Borrowing money to buy a residential investment property was a reason why some people were setting them up.
It's probably not the main reason.
That was not a good reason to set them up.
It definitely wasn't. From a financial advice perspective, we would be suggesting, we would be saying to more people, no, don't do it than we would do it. That's for sure. But there's a whole lot of reasons why you would potentially want a self-managed super fund.
Pulling money with your family, for example, buying some bigger assets together, maybe going into partnership with something else, some complex estate planning rules, just the flexibility. So there's a whole lot of reasons why you'd want a self-managed superannuation fund for the right person. But I don't think these
tax changes and the relative, you know, super being that relatively more attractive other than maybe waking a few people up to the attractiveness of super. Like it's well and truly dominating the, you know, the conversations I'm seeing online now. And so that can only be a good thing. You know, there's a whole lot of people now that are really starting to take super more seriously.
It might mean that more people end up setting up a self-managed superannuation fund possibly, but I don't think that the changes themselves are going to be a big driver of that.
Right. OK. I would contest that. And I would think that if super is better than it was in relative terms, then SMSFs are too. So I think you would get I think you will get a lot of people who were borderline, if you like, swinging voters, if you like, will move to them. But and I'm not saying that I would hope that this attracts the right people and I hope it doesn't attract the wrong people.
When I say the wrong people, I mean people who will end up losing money or will not do as well as if they had stayed with big super. We never want that to happen. Make that very clear on the show. Always, I hope. OK, the other thing I want to ask you then is on that issue, what's the minimum amount you think someone should have to start a super fund?
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Chapter 5: What changes were made to negative gearing rules?
So just at an LVR level, how much deposit do you have to put down versus how much will the bank lend you is very different in super fund land. then you have to be able to service that loan that you're taking on from a combination of rent and super contributions.
Sorry, James, you won't be able to get a loan anymore, will you?
You can for commercial, not for residential. For commercial, yeah. So not for residential, yeah. So on the commercial side of things. So you always needed more money anyway because you had to put a bigger deposit than if you were trying to buy a property in your own name. But then you want to make sure that there's some buffers in place quite aside from a diversified portfolio.
Like what if you don't have a tenant for a period of time? What if something breaks and you've got a tax bill that you need to pay? So that always, we would always, when we were doing these strategies, we would be suggesting to most people that you'd want close to half of the purchase price actually in cash when you were going through these property transactions.
You wouldn't be putting half of it up. You would be putting less of that. But to give yourself some buffers, some diversification, try and have some shares on the side if you can, it was getting close to almost needing half of the purchase price in cash is where we would be comfortable when we were recommending the strategies.
All right. And folks, when I say half a million on minimum for starting an SMSF, I'm assuming you're getting advice, and you're paying for advice, and that has to work. It has to work out if you're not. So if you're doing something extraordinarily simple and you're very cross-investing and you're working on ETFs and that sort of thing, of course, it can be lower. Okay.
We're going to talk about something very interesting in a moment, which is... something you might really find very interesting about the realities of lending in SMSFs and borrowing and what you can and cannot do. It's prompted by a question from Frida. We'll deal with that in a moment. Hello, welcome back to the Australian's Money Puzzle podcast.
James Kirby here talking today with James Wrigley, financial advisor from First Financial. He's been on the show before and always a very clear thinker on the big issues facing you as an investor. Now, folks, the headline news, the latest headline news, and boy, oh boy, there's a twist happening. A backflip or an unexpected measure on a weekly basis here post-budget.
Last week, I think it was only last week, the government did properly and correctly announce that they would not include testamentary discretionary trusts in the new family trust tax laws. And that is a damn good thing. This week...
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Chapter 6: How does capital gains tax affect superannuation investments?
Have I got that right, James, first of all?
Yeah, for the most part, yes. Your super fund can own an asset jointly with you as an individual, provided it's all done at arm's length and market rates and all the rest of it. And then you jointly share in the ongoing costs and responsibilities of maintaining that property. So you as the individual can't pay all of the bills and yourself when your super fund gets a free ride.
You have to split it in accordance to whatever the ownership percentages are between you and your SMSF. But yes, absolutely, that strategy has been... a valid strategy and around for many years. Yeah.
But the interesting part is that the SMSF money is ring-fenced, it's ungeared, and it's only you, the personal private investor, your part is geared and it's allowed, which allows a person to use borrowed money to buy a property involving their SMSF. I'm trying to get the words bang on here so I don't have Treasury ringing me. And they love to ring me on Saturday morning. You know that?
It's a long week, but they like to call me on Saturday morning to complain about me or whatever they have to say. So I thought it worked fine. I was delighted to be able to use it, James, because I didn't have a deposit for an investment property at the time. I certainly didn't think I had one loose. But I thought my super fund had it and it all worked out fine.
The regulatory issues weren't hard. You have to create a unit trust, as I remember, as a holding vehicle, if you like. Is that right?
Most of the time it's done through a unit trust. I don't think, depending on the setup, it may not necessarily, but most of the time it's done through a unit trust and you'll have the unit trust, you'll then have individual ownership percentages. You might own, there might be 10 units in the unit trust and your SMSF owns 20 of the units and you own eight of the units personally.
Kind of work through the lending arrangements, like you're, you know, a You can't use that property. You're not going to be able to use that property as security for the lending. It's likely to be difficult. You might have to have other assets, you know, your own home, for example.
Probably it was my home. I'm just thinking back. It was years ago.
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Chapter 7: What minimum amount is needed to start a self-managed super fund?
You definitely need tax and legal advice in setting up that. That's a pretty advanced strategy, not something you'd want to be doing on your own.
Yes, so I was surprised. It had very few issues or wrinkles, and banks had no problem whatsoever. Okay, can I ask you a quick one? We were saying in the first part of the show, if super is better than it used to be, then I wonder, the new super tax, Division 296, which imposes an effective 30% tax on amounts above 3 million, I wonder... Is that super tax less of an issue than it used to be?
And would less people be running around trying to take money out of super if super is more attractive than it was?
Interesting take on it, but I think you're right there. So it always comes down to, and it did before, and it does going forward under this new CGT regime that we will likely have. It all comes down to what is the alternative structure and ownership for these assets.
And there's some people that we work with that for whatever reason, they're already a 30% marginal tax rate payer in their own name. Maybe they're still working, running a business or got assets at such a level, whatever it may be. And for that person, it probably didn't make sense for them to take money out of super anyway, even if they're going to have to pay a higher rate of tax.
But now for that person that doesn't have any income in their own name, it may not make a whole lot of sense to pull large amounts of money out of super. We need to remember that The interest or the dividends or that kind of income return that you earn on these assets, that's still going to be taxed at marginal tax rates, whereas in the super fund, that's going to be at 30.
And so from an ordinary income perspective, you're better off in your own name than you are in super, assuming you don't have any other income in your own name.
But from a capital gains tax perspective, then it's a fairly similar setup, albeit remember that the capital gain on the assets in your own name is going to be indexed with inflation and then a minimum 30%, whereas the capital gains tax under this Division 296, if that's where all of the earnings lands, is going to be a flat 30%.
So you've probably got a higher capital gains tax bill in super than you would in your own name, but it's not night and day like it was before. It's certainly something that needs some extra thinking. I think there will be less people pulling money out of super because the alternative of outside isn't that much different for some people now anymore.
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Chapter 8: How can joint ventures work with SMSF for property investments?
Brad, great to have the Vanguard CEO on of late. That was Daniel Trimsky. It got me thinking, why do ETF providers not offer specific products for children? Investing in a miner's name is a minefield problem. With current interest rates, a balance of just over $8,000 can push a child over the income threshold, triggering a brutal 66% tax rate.
Could an ETF launch a safe high growth offering specifically for this? They could even call it KIDS! K-I-D-Z or K-I-D-S. He's thinking of all these smart ETF houses that are forever calling their ETFs by smart names to capture people's imagination. Yes, thank you, Brad. The marketing department of the various ETF houses will be delighted with your idea, I'm sure. I wonder, I...
I don't know and I haven't had the chance to ask them. And you know what? If I ask them, they will never come back because it would just confound and there'd be about 20 people involved and they would just be paralysed in giving an answer like that. So I'm not even going to try. Sorry. There's a reason they haven't and I imagine it's too hard. What do you think, James?
Could they? Yes. For the most part, these ETF providers are really just in the market of providing an investment option the entity through which you own that investment option is then entirely up to you, the investor. Now, mentioning Vanguard, they have launched a super product, but for the most part, these ETF providers are really just providing an investment option.
And then the product providers will then provide almost like a wrapper around the outside. One area where you can get, and it's not the ETF version, it's the managed fund version of a lot of these indexes and the high growth option or the Australian share option or wherever it might be, that is commonly used for children in this case is an investment bond.
And so you use the wrapper of an investment bond, which doesn't have this brutal tax rate that was mentioned. The investment bond will pay a maximum rate of 30% tax. Could even be an education bond that then has some added benefits if some of the money's been used for children's education.
But then through that umbrella of the investment bond or the education bond, you then pick one of these index-style investments. Now, it's not the ETF. They're just some of the rules around them. It can't be an ETF. But most of these providers also have a managed fund version of exactly the same thing. A passive fund, right?
Yeah, and where the cost is almost identical to what the ETF version is. So you can get the same investment experience. You just own it in a different structure that doesn't come with these tax burdens like it does for children.
That's a terrific answer. Thank you. The next question I was going to ask you was, for Brad, is there something that comes to mind? This is never advice, folks. It's information only. Several people, I have to say the majority of people on the show, when this comes up, Listeners are always asking about investment bonds. People on the show are always saying I don't like them.
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