The Joy of Super
If you've made it this far, hang in there. Let's talk super for a minute. No froth and bubble though, we're crunching numbers. At the end of this you might even understand the joy of super for yourself...
Diving Straight In - Super and Tax
If I make a personal contribution of $25,000 to my self-managed super fund this year and claim a tax deduction, I know that I've just saved $6,000. My personal tax bill is $9,750 less thanks to the super contribution, but my super fund pays tax of $3,750 on receipt of the contribution. By shifting my own money from here (my bank account) to there (my superfunds bank account), I've generated an immediate return on that money of 24%. The balance of the money in super ($21,250) is still mine and I can choose where it is invested, it's just subject to certain rules and there are restrictions on when it's able to be released to me. If I were to instead invest that $25,000 in (for example) a fixed income fund in my own name, with after tax earnings reinvested, it would probably take me at least 4 years to generate an after-tax return of 24%.
Expanding the Concept - After Tax Returns
To continue the above example, let's say that $21,250 is immediately invested in my self-managed super fund in the same assets (fixed income assets) and compare that to holding onto and investing the $25,000 outside super. And let's assume that these fixed income assets can generate a 6% return (before tax) each year over the next 5 years. If I invest the $25,000 held in my name personally, I end up with an investment of $29,922, after tax, at the end of 5 years. If I invest the $21,250 in my self-managed super fund and generate that same 6% return (before tax) each year over 5 years, I end up with $27,250 (plus my initial $6k immediate tax benefit). So not only have I started $6k in front thanks due to the upfront tax deduction, my super investment is also catching up to my personally held investment because of the lower tax rate paid on investment earnings in the super environment. In fact twelve years on, given the same assumptions as used in the five year example, my super investment is now worth more than the investment held in my personal name.
Wrapping Up
A self-managed super fund is certainly not for everyone, but one of the main reasons people choose them is that they can be used to invest in most of the same assets you might want to invest in outside super. What better way to provide for your retirement than investing tax effectively over your lifetime in your super fund. The accumulated tax savings might be in the hundreds of thousands!
If you would like to learn more about self-managed super, we'd love to have a chat sometime. For more information about super, check out these articles by Australian Super and moneysmart.gov.au.
Bunbury: (08) 9721 8218
Dunsborough: (08) 9755 3049
reception@rwkaccountancy.com.au
Author: Phil McCredden CA, Director.
