After a bit of speculation, we are finally at the point where we know what Treasurer Jim Chalmers Super tax will look like (if it gets passed).
That is, moving the Superannuation (accumulation phase) tax system away from a flat tax system, and instead add a second tax rate for earnings over $3million asset mark. (It looks like they will be using changes in TSB to calculate the additional tax payable, however that would mean that unrealised capital gains will get penalised, which I think is a terrible idea (and will mean they need to track carried forward losses, on investments they haven’t even sold, and would just be an absolute mess))
And also, what a lot of people want to see is how he tackles the Politicians generous defined benefit pension schemes since they don’t have a lump sum value.
But if you are like me, and recognise the picture below, let’s have a look at the average super balance, and what it would take to get to the $3 million mark.
In an ABC article I read this morning Superannuation tax changes will not be indexed, says treasurer. Here’s what that means – ABC News they quoted Alex Dunnin from Rainmaker Group who said
“At age 25, he says you would have to be earning $200,000 a year, to have $3 million in super by age 67 (under the assumption your super contributions are 12 per cent per year, earnings were 5 per cent per year for the next 42 years and you pay 1 per cent in fees). “
I personally haven’t come across anyone earning $200,000 a year at 25 (I think the highest is $140k at 26), but what was interesting was the historically low return assumptions and the fact that a person wouldn’t contribute.
So back to us, who recognised the light house from around the twist, we are in our 30s, and should have around $100,000 in our superannuation.
What would it take to get us to $3million by the time we hit age 60.
The maximum you can contribute into superannuation each year is $27,500, so we will assume we are smashing the cap each year. (however we will see if we can make it without making any Non Concessional Contributions)
So now it is about the long term performance of investments.
Using Australian Super as our base line we have added in the 10 year return of their balanced fund (9.32%p.a) along with the fees associated with it.
Maxing out the contributions each year gets us to $1,132,000 in our superannuation at age 60, or $1,599,000 at age 67.
If your stating balance was $200,000 you’d hit $1,887,000 in your super at age 67.
So even with a high return and maxing out the cap, it doesn’t look like we will ever come close to the cap.
So how would you hit the cap?
Well, you would do it with an SMSF.
An SMSF gives you the ability to get leveraged returns, so stead of just using your money to grow your wealth you are using the banks money. Provided you can pick the right property, and SMSF lending rates remain reasonable you could give yourself the returns required to hit the mark.
Another one, (which is available to many people) is giving your SMSF options of the company you own, that way your SMSF can exercise the options and get a great return on the investment. (I’m not sure how you actually go about doing this though as I am not an accountant)
As mentioned previously, I am a fan of this idea, as I remember having to do a study on this at Uni comparing the cost to taxpayers comparing Superannuation tax concessions (as a loss of revenue) vs paying people the aged pension.
The latest data Tax Expenditures and Insights Statement (treasury.gov.au), Welfare expenditure – Australian Institute of Health and Welfare (aihw.gov.au) shows we are not there yet, but concessions on Superannuation is sitting around $50 billion, and the aged pension is sitting at $76 billion.