Creating
wealth is a long-term process, and in the same way that being a small degree
off-course can have a huge impact while navigating a long journey, small
effects add up to big outcomes over long-term investing.
As
such, tax efficient investing creates better returns for no extra investment
risk. For example if you built two identical portfolios in two separate
entities, with the only difference being the tax rate applied to the earnings,
the result will be better returns for the entity with the lower tax
environment.
With
that in mind there is a tax structure in Australia you can build assets in, so
tax efficient it makes seeking a tax dodging strategy like an offshore bank
account in the Isle of Man redundant.
Why
risk either being ripped off or going to jail by siphoning your money offshore
to avoid tax, when there is a perfectly legal way to reduce your tax right now?
Very
few people understand how attractive this tax vehicle is, as it has a very
boring and bureaucratic name. Considering the advantages of ending up with more
money in your pocket over the long term, it’s strange you never see this tax
structure up in lights.
However,
for those in the know, it has such unbelievable advantages that the government
built restrictions on how much you can put in. They did so to stop those who
bother to wade through the technical data from pouring as much money in as
possible.
Lucky
for you, I’m going to save you the hassle of peeling through hundreds of pages
of dry government fact sheets, and instead put all the tax benefits here for
you in plain English.
The
crazy thing is, you would already have heard of this tax structure before,
probably even own one, but found it to be as stimulating as a Top 40 dance
track from the 1990’s (Except The Prodigy, they were awesome, and I won’t hear
another word about it.) It’s called Superannuation.
The
misconception about Superannuation is that it’s an investment. It isn’t. It’s a
tax structure. Think of it as a car. Just as you can put almost any kind of
person in a car, you can build almost any kind of investment portfolio inside
of Superannuation (restrictions exist: here for summary, here for in-depth).
It
will save you money right now today, save money every year, and save money in
retirement. Put simply, with the choice to build an investment portfolio in
your own name, compared to building an identical portfolio in Superannuation,
you can ensure a better after-tax result by using a tax-efficient entity while
not taking on additional investment risk.
1)
SAVE MONEY TODAY
As
an ex-tax accountant, I can’t tell you how many people ask this question around
tax time: ‘What can I do to reduce my tax?’ Most people hate paying more tax
than they must, and will do anything to reduce it. Think Negative Gearing, the
purposeful loss in income to pay less tax.
What
if there was a way to reduce your income, but rather than losing your money
through Negative Gearing, you kept the money instead?
This
strategy is called salary sacrifice. It is redirecting a portion of your salary to Superannuation and is taxed at 15% (for incomes <$300k). For example, if
your salary is above $180k, you pay close to half your income in taxes and
levies. By redirecting a portion of your salary to long-term investments, you
immediately save over 30% in tax.
2)
SAVE MONEY EVERY YEAR
Investments
should earn the investor income every year. If you hold investments in your own
name, this income goes on top of your salary. For example, if you earn $80,000
per year from employment, and a further $20,000 per year in investment income,
the investment income is taxed at almost 40%.
If
instead, you earned the $20,000 investment income inside of a Superannuation
tax structure, you would have only paid 15% tax. Saving over 20% tax on your
investment returns every year of your wealth creation is going to have a
substantial positive effect on your long-term results. Also, as franked
dividends are taxed at 30%, and the tax environment for Superannuation is only
15%, you’re able to claw back the other 15% tax from the government. Imagine
that! The government paying you tax instead of the other way around!
3)
SAVE MONEY IN THE FUTURE
The
benefits of the Superannuation tax structure are impossible to beat once you
hit the age you are finally going to start using your asset base for the
purpose it was designed for: to pay you an income when you no longer work. It
is impossible to beat because these three points have a tax rate of 0%. And you
can’t beat 0% tax. It’s truly an offshore bank account within our own borders.
3a.
SELL ASSETS FOR 0% CAPITAL GAINS TAX (CGT)
When
a couple in their sixties is sitting in front of me and about to declare
retirement, they often tell me with pride the size of the investment portfolio
they have built up over the last forty years in their own names. Properties,
shares, managed funds etc.
The
pain in their eyes when I tell them the size of their tax bill because of their
success has stayed with me. It’s not fun learning you have to pay the
government hundreds of thousands of dollars just as you’re about to start
surviving on the spoils.
If
they had only known about the ability to transfer assets held inside of
Superannuation into tax-free environments before selling, they could have
avoided every cent of tax payable.
As
soon as you ‘flick the switch’ on the Superannuation tax structure from
‘accumulation’ to ‘pension’, every asset immediately becomes tax-free (assuming
your super account allows this).
3b.
TAX ON EARNINGS DROP TO 0%
For
the entire wealth creation journey inside of Superannuation, you only pay 15%
tax on all earnings by investments. And it gets even better from there. Once
you hit pension phase, the tax then becomes 0%.
From
the moment you start receiving income from your assets, your investment
portfolio will live in an entirely tax-free environment, never to pay tax on
investment earnings again.
3c.
INCOME FROM SUPERANNUATION IS TAXED AT 0%
And
finally the last benefit of reaching pension phase and having your assets
inside of a Superannuation tax structure, is the income you draw down to fund
your ideal lifestyle when you no longer work is taxed at 0% also (Only after
age 60. From age 55 – 60 the income is taxed Marginal Tax Rates less 15%. This
age 55 access is only available to those born before 1 July 1960. Sounds
complicated but it isn’t. If you are under age 50 now, you have to wait until
you’re 60.)
From
the benefits above, you can see the Superannuation tax structure is the best
entity for you to build an investment portfolio in the short term as you pay
less tax today, the medium term as you pay less tax every year, and the long
term when all assets and income become tax-free.
Now
consider the only ‘downside’ of using Superannuation to build an investment
portfolio: you can’t spend the funds until you reach retirement. But investing
is a long term endeavor, so I have no qualms in putting forward the merits of
Superannuation.
So
how do you get money into your superannuation? Firstly you can use Salary
Sacrifice to get pre-tax money in there. This can be helpful to save tax today,
but it has low thresholds (found here note this limit includes your mandatory
super contributions from your employment).
You
can also simply deposit money into super from your bank account as it is
after-tax money and the threshold is much higher (found here), however when was the last time you did
that?
Raiz
again have come to the rescue by bringing this valuable tax entity to the
fingertips of the money-smart. All you have to do to start being proactive in
using this tax effective vehicle to build your long term asset base is 1) click
Settings, 2) click Super Fund and follow the prompts. The simplest way I’ve
seen to start using the benefits already afforded to you under law.
Disclaimer:
While deep diving into topics and education is great, we have a responsibility
to ensure you don’t make any mistakes so please read this statement first:
Superannuation
is not an offshore bank account, and the term is used as an entertainment
analogy only. Thresholds and super laws are notorious for changing, and the
rules change frequently. As such, Clayton Daniel nor Raiz cannot be held responsible
for the validity of the information contained in this article, nor the outcome
you achieve with this information. This article gives an overview of the tax
benefits of superannuation, but it does not reference the returns of the
investments within any Superfund. It neither takes into consideration your
personal situation or your needs. Therefore the information is general in
nature. This article – and indeed any article – is not capable of being used as
personal financial advice nor is it intended to be. If this isn’t clear enough,
before taking any action with superannuation, get professional advice first.
More information can be found here.
Clayton
Daniel is a financial commentator best known for reducing decision fatigue
through financial automation. He is the author of upcoming book Fund Your Ideal Lifestyle.
Don’t have the Raiz App?
Download it for free in the App store or the Webapp below:
Important Information
The information on this website is general advice only. This means it does not take into account any person’s particular investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the product.
A Product Disclosure Statement for Raiz Invest and/or Raiz Invest Super are available on the Raiz Invest website and App. A person must read and consider the Product Disclosure Statement in deciding whether, or not, to acquire and continue to hold interests in the product. The risks of investing in this product are fully set out in the Product Disclosure Statement and include the risks that would ordinarily apply to investing.
The information may be based on assumptions or market conditions which change without notice. This could impact the accuracy of the information.
Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz Invest or Raiz Invest Super.
Past return performance of the Raiz products should not be relied on for making a decision to invest in a Raiz product and is not a good predictor of future performance.
