Making The Most Of Salary Sacrifice To Super

Here's how to save some tax, invest in a growth asset (property) and make superannuation work for you now and in the future.

Is this You?
Let’s assume your current salary package is $90,000 and you also have equity in your own home and your current SG contribution (9%) is sacrificed. Your total taxable income is $81,900, your personal tax liability on this is $35,582. Leaving a net cash position of $46,318.

If you were to attempt to purchase another property, valued at $400,000 secured by equity in your home, your interest payments would be $32,000 (at interest rate 8%). The likely net rental return on the rental property would be $12,000 (3%). Your new taxable position will therefore be $61,900 and the tax liability $15,930. Your overall cashflow position will be $45,970.

Fine as it stands – but here’s how to make it really sing!
You currently have rollover monies of $100,000. Establish your own self managed super fund which then invests in a unit trust. The unit trust would have two investors; yourself, and the super fund. The unit trust has funds of $100,000. You borrow $300,000 personally for investment purposes, secured by your home. You use the borrowed funds to acquire units in the unit trust. The unit trust, now with funds of $400,000 then buys the property, valued at $400,000.

The interest paid on this personal investment loan is tax deductible. In order to repay the loan, we recommend you salary sacrifice a larger contribution to super of, say, $30,000. This will reduce your taxable income to $60,000, less interest paid on loan of $24,000 (at interest rate 8%), plus the property rented with a net return of 12,000 (3%). The capital on the loan could be repaid by redeeming unit holding investments, which may incur no tax. Your super fund could acquire additional unit holdings to the value of around 25,000 units. You could sell unit holdings to the value of around 25,000 units. This equates to $25,000 that could be repaid off the loan.

Note: Building write-offs and depreciation are identical, and ignored for comparative purposes.

In Summary:

    * Your taxable income is reduced to $48,000, paying tax of $10,872
    * You will be cashflow positive to the order of $62,128
    * Your interest rate sensitivity will be reduced from $400,000 to $300,000

Key Features:

    * Limit capital gains tax to 10% on investments held for more than 12 months
    * Opportunity to be CGT free if asset is not sold until after retirement
    * May facilitate the purchase of a rental property you would not have been able to acquire
    * More tax efficient versus normal negative gearing by $5,058
    * More tax efficient than doing nothing by $24,710
    * Allows you to purchase higher value properties, and possibly more capital gains
    * More cashflow positive to the tune of $16,158
    * Property must be kept wholely unencumbered (no debt)

The cashflow and tax advantages, mean that marginal tax rates can be eliminated. You will also be able to increase your superannuation entitlements, yet increase your cashflow. The superannuation fund will retain an illiquid asset, yet your investment will retain a cashflow position that normal property investments cannot achieve.

This example is not designed to provide advice, and is merely an example of one possible outcome. Your personal circumstances must be taken into account prior to making any decision. We strongly recommend that you seek advice from a specialist licensed financial adviser prior to making any decision.

Disclaimer:

No investment advice provided to you.
This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any adviser.