How can we know what will succeed, or give the better result?
The question is –
Do we invest invest inside or outside super?
Moving investments from outside your super into a Self-Managed Super Fund (SMSF) could produce significant results due to the tax benefits of super.
It can depend on several factors, such as your income tax rate. Lets look at an example both outside and inside super and the tax consequences –
For example OUTSIDE super
Let’s say you have investments in your personal name valued at $300,000. If you are on the top marginal tax rate of up to 45% (2019) that will be calculated on the income and capital gains generated by the investments, above your regular income. Assuming an investment income return of 3% per annum, this will give you $9,000 income – at the top tax rate, this could raise $4,500 in tax per annum payable on the extra investment income.
Worse still, assuming the investment doubles every 10 years (a generally accepted investment principle) the capital gains tax bill on sale would be approximately $67,500 (the extra $300,000 gain by 45% with 50% Capital Gain deduction, rounded).
Even if you don’t plan on selling the investment, eventually the investment will be sold even if your beneficiaries sell it after you pass, and the tax bill will still be there.
For example INSIDE super
Alternatively, transferring the investment into your SMSF (noting certain transfer restrictions), or purchasing with super money in your SMSF, the tax on the annual investment income will fall to $1,350 per year (super tax is 15%, so $4,500-$1,350 is a tax saving of $3,150 each year).
Then, later, after you commence a Pension the tax rate is 0% (a tax saving of $4,500 each year – all! – Note within the Pension Account max Cap. Of $1.6mill in 2019).
In addition, while in pension, there will be no tax on the capital gain in your SMSF if the investments are sold after you commence a Pension. This can equate to a tax savings exceeding $100,000 depending on the period viewed!
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