Salary Sac to Super vs Putting $ on IP Loan???

[mixedup]

It seems much better to put any spare money (from your job) to super via salary sacrifice then it does to take it and put it on your IP loan. I've put my notes/calculations below. Just after some confirmation I'm not missing something here or made a mistake in calculations?

I've attached two calculations, the first with 9% projected super fund return, and the 2nd with a 5% super fund return. In the latter the super fund return is set to the same value (5%) as the IP interest rate.

The reason the Salary Sacrifice is so much better is:
* tax on initial amount is 15% as opposed to 37% tax
* over recent years super funds returning ~9% per year, whereas IR on IP loans are around 5% only
* savings on putting against IP loan is even less than the IR noting you would have got some negative gearing benefit too (assuming the IP is negatively geared)

Case 1 - 9% Super Return

Case 2 - 5% Super Return

 

[tobe]

option 3, put your extra money, and drawable equity in IP towards another IP deposit.

 

[mixedup]

wanted to stick to just understand if my comparison of these two options is correct for the moment...

 

[Scott No Mates]

Now that is for a one off SS to super/offset account. If you repeated the contributions for the next four years or for the entire period (either on static income or increasing @ 3% pa) the results are staggering.

 

[Aaron_C]

How old are you? Be wary of putting too much into superannuation especially if you are young. Let's not forget that superannuation cannot be used to generate income for you until you are at least 65 (or more by the time most of us get there). How are you going to eat in the meantime? Not to mention it is far harder to control superannuation investments due to the legislative restrictions vis-a-vis personal investments.

 

[mixedup]

Now that is for a one off. If you repeated the contributions for the next four years or for the entire period (either on static income or increasing @ 3% pa) the results are staggering.

thanks Scott - so is my logic/comparison correct then from your point of view?

 

[Scott No Mates]

The calculations don't take into account 'total return' ie unrealised capital gains + net rent.

 

[tobe]

wanted to stick to just understand if my comparison of these two options is correct for the moment...

maybe, but what does that prove?

 

[Paul@PFI]

Super strategies can be VERY effective and can be increased if regular contributions are also included. The issue is how is the super to be invested ?? If its all in high risk shares and exposed to market risks then its fair to weigh up the inevitable market corrections which can hurt,

The age of members is important too. Their risk profile and age to retirement may determine different issues:
- Deferring CGT sales until after pensions commence (age 58+)
- Tax rate of zero on CGT v's ordinary 10% tax.
- Preservation age and conditions of release
- Ensuring life insurance is funded by SS rather than held outside super
A 0% tax rate can really enhance super balances but then a minimum pension must also be paid. If there is still salary income maximising SS within caps can boost things. If caps are breached it can unwind the benefit.

The estate planning aspects of SS also must be addressed. An increased balance may now be inherited by a beneficiary who will be taxed. SS and other employer contributions are a taxable form of death benefit to some beneficiaries eg : Adult children. So a SS strategy may need a recontribution strategy at some point. This beneficiary tax is a hidden 16.5% or more death tax associated with salary sacrifice. It can also mean any CGT assets must be sold to pay a death benefit and these will be taxed rather than exempt.

It pays to consider the whole strategy and not just the bits "now".

 

[Paul@PFI]

The calculations don't take into account 'total return' ie unrealised capital gains + net rent.

Remember too that super assets aren't used by banks in assessing lending. You cant sell them down to pay debts etc. The $9K outside super is your asset. The $15K inside super is preserved.

You can buy an IP and kick in $45 a week outside super if the bank will lend to you but you cant contribute an extra $45 a week to super and buy an IP unless you have a SMSF and the fund has existing accumulated cash..

 

[Nth Brisbanite]

option 3, put your extra money, and drawable equity in IP towards another IP deposit.

I would agree here that the purchase of another IP after saving a deposit will probably in the long term (assume that mixup is young and buys in reasonable location) be a far superior wealth creation strategy than salary sacrificing.

 

[Scott No Mates]

How old are you? Be wary of putting too much into superannuation especially if you are young. Let's not forget that superannuation cannot be used to generate income for you until you are at least 65 (or more by the time most of us get there). How are you going to eat in the meantime?

Spoken like a financier not a financial advisor.

Taking a position on super and understanding that it part of an all encompassing investment strategy is important, especially at an early age. Sure, Salary sacrifice is optional but has the greatest compounding benefit when commenced early.

If you consider that you can incorporate your super into your strategy by having an smsf and having control over the investments, access to lower taxation during the life of the fund and beneficial tax treatment for capital gains you'd be foolish not yo consider it as one of your financial assets which requires nurturing and tending.

Where the intention of many investors is not to qualify for the pension this can be used to quarantine income in a concessionally taxed environment.

A one off ss investment in super isn't going to affect whether or not the op can put food on the table as he is feeling out whether it is better to retain/invest 85% of his surplus $10k (in super) or only 63% in a more liquid environment (cash/offset/equity).

Is 22% additional taxation too much of a premium for liquidity?

 

[mixedup]

great info/replies thanks - seeing it seems significant I can note I'm about 12 years out from being able to access super (at 60)...however I have the ability to acquire additional IPs (if I can convince the boss) using equity (buffer) so my specific question will still be valid here I think. I'm effectively saying perhaps that we won't be pushing the LMI very high re IP investment.

An increased balance may now be inherited by a beneficiary who will be taxed. SS and other employer contributions are a taxable form of death benefit to some beneficiaries eg : Adult children.

Ok, hadn't even been aware of this Are you effectively saying Paul at a high level, an IP property could be transferred after death with no impact, but transferring your Super to someone else would be taxed? Would this be only true if death occurred before you retired I assume?

 

[Scott No Mates]

Remember too that super assets aren't used by banks in assessing lending.

Unless of course the borrowings are for the super fund not yourself.

 

[Paul@PFI]

Of course. But with $9K of super assets I would imagine a very small loan may meet serviceability. Especially after fund setup, legals, etc.....

 

[Paul@PFI]

great info/replies thanks - seeing it seems significant I can note I'm about 12 years out from being able to access super (at 60)...however I have the ability to acquire additional IPs (if I can convince the boss) using equity (buffer) so my specific question will still be valid here I think. I'm effectively saying perhaps that we won't be pushing the LMI very high re IP investment.

Ok, hadn't even been aware of this Are you effectively saying Paul at a high level, an IP property could be transferred after death with no impact, but transferring your Super to someone else would be taxed? Would this be only true if death occurred before you retired I assume?

If you die the elements of the super are considered elements of the death benefit. If left to spouse or dependent children no tax. If left to adult children directly or via a will its taxable to them on the SS and employer contn elements at 17% (I forgot to increase it for higher medicare levy). Only happens if you die after you have been alive If you die before or after you retire. Age isn't a factor.

Have you considered a hybrid way of achieving BOTH outcomes ??
A ungeared unit trust with a SMSF as unitholder with a strategy to switch ownership of the IP progressively to the fund may be considered. Neg gearing for the individuals who fund it. +ve geared to SMSF. Gradually transfer ownership towards SMSF without duty. Long term SMSF owns 100%. Pensions = 0.00% tax..... A strategy that needs advice. Its got lots of areas for holes but is fairly simple.

 

[alexlee]

Ok, hadn't even been aware of this Are you effectively saying Paul at a high level, an IP property could be transferred after death with no impact, but transferring your Super to someone else would be taxed? Would this be only true if death occurred before you retired I assume?

You can sign a binding nomination to pass super to your estate, and have a will that allows testamentary trusts.

 

[Terry_w]

You can sign a binding nomination to pass super to your estate, and have a will that allows testamentary trusts.

Yes, but the super will be taxed at different rates depending who receives it. That is why I make sub trusts for the super in my testamentary trusts - superannuation proceeds trust. It can then be diverted to the dependants where possible. An equilisation clause means that the executor can even things out so if you get more super you get less of the other stuff sort of thing.

Also the taxed element could be reduced by doing a withdrawal and recontribution strategy.

 

[Paul@PFI]

You can sign a binding nomination to pass super to your estate, and have a will that allows testamentary trusts.

Wont change tax I'm afraid. If the estate beneficiary is not a super dependent beneficiary then same tax issues arise.

This is why reversionary pensions can only be paid to a dependent. If its not the rev pension fails and its dealt with by a nomination or usually it goes to estate. And as Terry suggests the best strategy is do a recontribution strategy to avoid the issue altogether.

In the old days some dodgy advisers suggested holding super on reserve to avoid these tax issues. But that doesn't work either now as transfers from reserves can count to caps.

 

[mixedup]

Salary sacrifice can be a large win over loans

Courier Mail article

Salary sacrifice can be a large win over loans