Wealth Intelligence

It’s time to consider structural diversification

Sound wealth management requires diversification of both structures and investments

Key points:

• Superannuation is extremely tax effective but its complex rules are constantly changing

• A sound financial strategy for those still some way from retirement requires diversification by investing in both superannuation and non-superannuation structures

The wrong investment structure(s) can mean too much tax is paid on investment income and gains, or the inability to access funds when required.

Superannuation: a problem of change

How and when members can access superannuation and the tax treatment of withdrawals [1] is always changing. This is because, for example, governments try to balance budget requirements (tax more) against providing support for self funded retirees.

And we can expect change in this area to continue.

Possible change #1: Preservation age

Unless you will be age 55 prior to July 2015, your preservation age (the age at which you can access superannuation) [2], is on the way up. For those born between July 1960 and June 1964, preservation age is between age 56 and 59 and if you were born after 30 June 1964, your superannuation benefits are not accessible until age 60. Preservation age is also likely to increase further to coincide with the increasing government pension age [3].

Possible change #2: Pre-selection of an income stream

A recommendation from the Financial System Inquiry was that superannuation fund trustees be required to pre-select an income stream product for a retiring member ‘unless the member chooses to take benefits in a different way’.

While this proposal is intended to assist in addressing longevity risk (the risk that members outlive their superannuation benefits by taking lump sums instead of income streams),
if adopted, it may reduce flexibility and add yet another layer to existing superannuation complexities.

Non-superannuation structures

Potential non-superannuation investment structures that provide flexibility and simplicity include joint names, an investment company or a family trust. A family trust may be the best choice for some.

Family (discretionary) trusts are relatively easy to establish, are extremely flexible, do not have contribution or access rules and can be very tax efficient.

Cash or assets can be gifted or loaned to the trust on establishment and annual trust investment income is distributed between family beneficiaries (which may also include a private company beneficiary) on a discretionary basis. Trusts may also provide a level of asset protection and a means of an inter-generational transfer of assets without triggering tax implications.

And you don’t need a large family to benefit from a family trust.

For example …

Anne and Mark are successful executives aged 50 and 49 without children who intend to commence winding down work from age 55. They each make maximum annual concessional and non-concessional contributions into their SMSF and have additional savings available for investment.

They establish a family trust and gift accumulated savings to the trust, which is invested in a diversified listed share portfolio.

They also establish a company beneficiary to receive most of the annual trust income distributions while they continue to work. Distributions made to the company are subject to a capped tax rate of 30% and no further tax is payable on franked dividend income (net of franking rebates) generated in the trust.

When they retire, franked dividends are paid to Anne and Mark from the private company (around $80,000 each) and supplemented with drawings from the trust. There is no tax payable on the dividend stream (net of franking rebates) and the trust drawings are subject to small amounts of capital gains tax as investments are partially sold down for liquidity.

When they reach age 60 (currently tax free) superannuation pensions are paid from their superannuation fund and the investments housed in superannuation are no longer subject to income or capital gains tax.

Summary: There is more to life than superannuation

Successful wealth management means capturing the opportunities of the range of investment structures that are available. There is more to life than superannuation.

The above information is general information only and does not constitute personal financial advice. Please contact First Samuel to review your wealth management strategies.\

[1] In addition to superannuation contributions, which have also been subject to continued government review.
[2] In order to access a lump sum the member also needs to be retired.
[3] The pension age will increase to 67 by 2023 and is proposed to increase further to 70 for those born after 1 July 1965.
IMPORTANT NOTICE:  Any advice contained in this document is of a general nature only and has been prepared without taking into account your personal objectives, financial situation or needs.
Because of that, before acting on any advice in this document, you should consider whether the advice is appropriate for you having regard to your personal objectives, financial situation and needs.