What Most Australian's Get Wrong About Superannuation

Aden Wilkins sits down with Jemma Sanderson from Cooper Partners and Katherine Creasy from Capital Partners to unpack superannuation, the one asset almost every Australian owns but very few actually understand. They dig into where super came from, the myths that trip people up, and the tax rules that can quietly add hundreds of thousands of dollars to your retirement.

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In today's episode: 
Why a small contribution decision in your 20s can outweigh much bigger contributions made later in life.
The real difference between industry, retail and self-managed funds, and how to think about which suits you.
Why your will does not control your super, and the estate planning trap that catches many families.
How the new Division 296 tax works, including the three million and ten million dollar thresholds.
The contribution strategies that let you move large lump sums into super when life allows it.

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Chapters:
(0:00) Welcome and Wins of the Week
(3:36) What Superannuation Is and Where It Came From
(6:50) Why So Few People Know Their Super Balance
(11:40) Risk, Growth and Choosing How Super Is Invested
(14:25) Industry, Retail and Self-Managed Funds Explained
(18:05) Myth One, Super Only Matters Near Retirement
(19:40) Myth Two, Employer Contributions Are Enough
(23:30) What Happens To Super When You Die
(24:48) Will The Government Just Change The Rules
(29:00) The Tax Concessions And Why They Matter
(36:20) Contribution Caps And Getting Money Into Super
(44:25) Division 296 And The Transitional Year Ahead
(53:00) Final Advice And Where To Start

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The Purposeful Investor Podcast is a public service provided for Australian investors wanting to make smart decisions with their money, avoid costly mistakes, look after the people they care about, and, have a great life!

We draw on over 30 years of experience from David Andrew and the Capital Partners team.

For more information on Capital Partners' award winning team, visit capital-partners.com.au.

Have a question? Email us ask@capital-partners.com.au.

This episode provides general advice only. We do not consider your personal circumstances when we share this information. Always refer to your financial adviser for advice about your personal circumstances. 

Capital Partners Consulting Pty Ltd AFSL 227148 trading as Capital Partners Private Wealth Advisers ABN 27 086 670 788.

Transcript

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Super Tax Maths That Adds Up

SPEAKER_01 0:00

I am shocked at my superannuation balance. I've got to be doing this because I love free money.

SPEAKER_00 0:08

And so. Even if it is $50 a pay, like that just makes a massive difference. A decision that you make in your early 20s can make hundreds of thousands of dollars, if not more, difference, in 40 years' time if I earn a hundred extra dollars.

SPEAKER_01 0:20

If that gets taxed in my name, I pay 39 cents and I keep $61. Then $85 goes into my super fund. So immediately I'm $24 better off. And by the time I'm 60, I'd have more wealth just because of the tax differential.

Aden 0:36

Government's just going to take my money or they're going to change the rules. Why would I put that in if I can't touch it until this time?

SPEAKER_01 0:41

None of us know what the government's going to do.

Aden 0:44

Welcome to another episode of the Purposeful Investor Podcast. We're a podcast for successful families who want to make smart decisions with their money and avoid costly mistakes. We're here so that you and the people you care about are going to be okay no matter what. And we're also here to set you up to live a great life. Welcome back to another episode of the Purposeful Investor Podcast. Today we're going to be talking about something that almost all Australians have, but I don't think all of them necessarily understand. It's the big wide topic of superannuation. We're going to be talking about where it came from, what it actually is, what are some of the myths, misconceptions, and the things that people might not necessarily understand. And to join me, I'm joined by two experts. We've got Gemma Sanderson from Cooper Partners. Gemma, welcome to the podcast.

SPEAKER_00 1:32

Thank you very much for having me.

Aden 1:33

And we've got Catherine Crasy from Capital Partners. Catherine, welcome to the podcast.

SPEAKER_01 1:37

Thanks. Happy to be here.

Aden 1:39

So you're both somewhat, not veterans, but you've both been you've both been um uh expert guests on the podcast before. So it's good to have you back in the studio. And we're going to be talking about a topic that you're both very well versed in. But before we get into the content, we like to start off with our little win. So that's anything you can reflect back on the last week. That was either a personal or professional win. So, Catherine, why don't you start us off with your win?

SPEAKER_01 2:02

Last Friday I knocked off a little bit early and went home because this never happens because where I live seems to be a bit of a black hole for fun. But at the park down the road, uh my nephew was playing football, so you might say that is not super fun, but for me that was really exciting. So I popped uh down there for the last half of his game to watch him play. Uh he was just coming off a broken collarbone, so not a great game for him, but still a nice thing to be able to do on a Friday afternoon in the weather was magic.

Aden 2:32

Lucatina Reserve? It is, yes, the Wembley Downs. Yep, yep. Yep.

SPEAKER_00 2:36

Just a couple of metres away.

Aden 2:38

Yeah, love it. What about you, Gemma? What was your little win?

SPEAKER_00 2:41

Mine's also kids sport related. So I'm involved in the uh my kids' hockey team and footy team, and on Saturday it was pelting it down for 8 a.m. hockey freezing down um at Creswell Park. Uh, and then on Sunday

Weekly Wins And The Big Topic

SPEAKER_00 2:56

it was a magic day right down at Swanborne Reserve where we were all expecting it to be foul, and it was just unbelievable. So the weather came along, we didn't win, but that's okay. The kids had fun. So yeah, I chalked that up as a win because you actually enjoy as a spectator being down there uh and watching kids play sport.

Aden 3:14

Yeah, love it. Um so mine is not kid sport related, so I'm um mine is on the friend front. So uh on the weekend had a few friends back in town who'd been either living in London or over East or up north, so a lot of us were back together and we just had a few drinks and a barbecue um and just a nice little win to catch up and have a bit of fun together.

SPEAKER_00 3:34

Awesome. Still a win, still an excellent win.

Aden 3:36

Um, so the to the topic at hand, I think it's it's become even more relevant, I guess, with a lot of the conversation from the federal budget and people are talking about tax structures, what does this mean? What does this mean for superannuation? So we really wanted to go into a bit of detail around what is superannuation, how do we think about it from a planning perspective? What are some of the, I guess, myths and misconceptions that people might have or not truly understand with regards to superannuation. But to start us off, why don't we why don't we go back to the beginning and talk about what are the origins? So why was superannuation brought in and what what was it there for or is it there for?

SPEAKER_00 4:13

Well, I I can start on that front. I wasn't in practice back then, so um, you know, being a veteran, but perhaps not that that long ago. And really it was it was brought in for to pay to allow people to save for their retirement so they were less uh likely to be on the the public purse on the age pension and to give like they they use this terminology even now, this dignified retirement, and it was locked away until that person retired, but you had tax concessions that were available on it. So it was um set up many, many years ago. And before, a lot of people think that compulsory super started in 1992 with the super guarantee. Uh, but before then, a lot of small businesses had their own employer super funds in the 70s, even so the early adopters set up super funds for their employees to provide an employee benefit, and then those morphed into people then having a self-managed super fund from there, and obviously it expanded out widely from that perspective. So it's it's been around for longer than people think, uh, and now it's it's on the tip of everyone's tongue. Like you said, everyone who is an employee has superannuation, so we do need to be more aware of what it is.

Aden 5:26

And do you think so our superannuation system is quite unique in Australia relative to the rest of the world? But do you think people not take it for granted, but do you think they understand how unique it is relative to other countries?

SPEAKER_00 5:37

I think people they we've started to take it a bit for granted that we have a superannuation system at and we've got different pillars, so the there's different retirement pillars that Australia has, but we are quite different to other countries in terms of how the superannuation is taxed and how you can build upon it, and also how you're able to use the money over the over whilst it's growing, whilst it's accumulating. Uh, for an example, in America, if you've got uh a superannuation or a retirement scheme, if you want to draw down on that to buy a house, you can do that. Um, you can borrow from it to to buy a home. But that's not the case in Australia, and I uh prefer the rules that Australia has rather than what the US has there. In the UK, uh you pay no tax along the way whilst you're accumulating and at actually at all in the super account itself. However, uh on on the back end, when you start drawing down, whatever you draw down is taxed as normal income in the UK, so we're quite different. So it's understanding which one's better, everyone's got um different purposes. Uh, and again, even our social security system backs up um and supports our the superannuation system differently as well.

Aden 6:51

And so there's a lot,

Why Superannuation Exists

Aden 6:52

there's a lot that sits behind the scenes with superannuation, and I think maybe that's why people don't pay as much attention or don't look at it. But if you think about Australia in general, everyone could probably tell you what the the houses and their streets sell for, what their house is worth, if they've got a share portfolio in their personal name. But that's not necessarily the case with super. And I might ask you this question, Catherine, like how often would you speak to a new client that comes in and they might not necessarily understand what they've got in super, who holds it, what it looks like.

SPEAKER_01 7:21

It is so common and particularly not knowing, they don't know their superannuation balance, but not even a ballpark sometimes. And I can't tell you how many times we've had clients who we've said, okay, well, we're going to establish superannuation, or you've only got this really small fund, so we're going to start adding to it, because obviously there's a lot of advantage to growing your wealth within superannuation. And then when they do start looking at it, they, you know, you say, You've got to go onto my gov and look at this because we want to see what the contributions have been in previous years. And then they say, Oh, I've got another fund, or I've got two other funds, and just completely like off the radar, don't even know you've got them, you've moved three times, they don't have your address. It's just so common that people don't know.

Aden 8:06

And then you go.

SPEAKER_00 8:07

So I was going to say young people as well, because they get one set up when they start their first hospital job when they're at a uni or uh and then it sits there and they move somewhere else and they always set up the default fund. And you like it's such a common example, and they're just not engaged in it, mostly because, oh, I can't access that till for 40 years. And I get it. Like you'd think that, and that's probably where we need to change that engagement level a lot with the young people. And in particular, because it's such a substantial part of their salary that is going into super that they really need to be more engaged.

SPEAKER_01 8:43

That's one of those things where I think when you're talking to younger people and you they're talking about their salary, it's like, oh, my salary is, you know, whatever it is, 90,000 plus super. And that plus super bit, they just it's not even on their radar. And so if you say salary is 90,000 inclusive of super, they're like, well, I've had someone say to me before, well, that's a bit of a lie, really, because I'm not getting 90,000. I'm only getting, you know, 80, whatever, thousand. And you're like, but that is that's actually real money that you should be engaged in. But yeah, the way that we even talk about salary, people discount the super just doesn't count to me because I can't see it for such a long time.

SPEAKER_00 9:26

And it's a a big determining when they're negotiating their salary. They're not thinking about the super bit, but it's 12% of what they're being paid, which is substantial. And then like, oh, I don't care. Well, it's like, well, you should be caring more about it. Yeah.

Aden 9:41

And we're just starting to, I think, get to the stage where people who've had sort of 20 to 30 year careers earning super actually, they're quite sizable balances just from employer contributions. But how do you how do you go about having conversations with people or trying to get them to take ownership over this structure that's actually theirs, but they might think is so far away in the distance. So what's a good starting point?

SPEAKER_00 10:01

Well, like um Catherine already went through, go go into MyGov, log in, see what you've got, all of that information is there. And and that's a good starting point. All of a sudden people are like, oh wow, I didn't know that even if it's tens of thousands of dollars in super and they haven't been uh working for very long, it's still something that they can make a decision about how it might be invested. Um, make a dis like have some agency over that money and be able to think about, okay, I am 22. Oh, wouldn't that be nice? Um, I am 22. And okay, my working career is another 40 years. So how like I maybe think that end in mind, what is that end? And I know that's hard when you're t in your early 20s or even in your 30s, people aren't thinking of this either. A lot of the engagement tends to be uh over 45 because people are thinking, wow, I've worked for 25 years, I've only got maybe 15 years left, so now I need to start paying attention. And so it's I mean it's hard to say be more engaged. I think if people a lot of people love, oh, I've got a share portfolio, like you said, in my own name. I've invested in this, I've invested in that crypto or this latest fandangled thing that I don't understand. Um so yeah, they're really engaged about talking about that. And so it's just changing a little it a little bit there, saying, Oh, with my super, I'm investing in this, this, and this. And that is happening more, you know, the barbecue talk sort of things. What were people talking about at your catch up on the weekend, Aidan? Were you talking about your super?

Aden 11:34

We didn't quite touch on superannuation, but maybe that would have been the next bottle of wine if we got there. Yeah, there you go.

SPEAKER_01 11:39

I think that that

The Engagement Problem With Super

SPEAKER_01 11:40

is a really important thing to be bringing. I bring that up with people all the time. And I think one of the things that as financial advisors we get taught, you know, in the due diligence of giving someone advice, you have to talk about what their risk profile is, so how tolerant they are to the ups and downs of the market. And I think that can be very one-dimensional when you're talking to someone about their superannuation fund. And what we see sometimes is people in their 20s and early 30s, even, um, who have been a little bit engaged in their super, but probably in the wrong way, because this concept of their risk tolerance, oh, I'm not very tolerant to risk, means that they've gone, okay, I better go into a balanced option on my superannuation fund. And when you're in your 20s and 30s is the time to be taking on risk, and really is when ideally you want high growth in your superannuation fund. Unless you're the sort of person who at 25 is looking at your super every day and can't sleep at night if it's gone down, you know, then we've got a different conversation about risk. But otherwise, that high that high growth thing makes a substantial difference over a long period of time. We've got this investment book in our office, which basically goes through, you know, what a what the returns of the market look like if you've got sort of 50% invested in shares and 50% in cash all the way up to 100%. And, you know, 2% per annum over 40 years is like we're talking probably hundreds of thousands of dollars in the end. So I find that being engaged and understanding that little piece can be very important.

SPEAKER_00 13:22

I think a lot of people also don't appreciate that they can go in and and make a choice about how it might be invested and and and change their mind along the way as well. So they sign up for the default fund, they tick the default option or they get plonked in the default option because they make no other choice, and then they don't realise that they can go in there and and that there's a much wider choice, which pretty much every single fund um in the country has available. So again, it's back to that. Be a little bit more engaged, do some research. I mean, we spend hours doom scrolling through our phones, maybe putting some of that time to some useful research on how to invest your super. Or be more engaged in your super. That's just really the big thing. It's just perhaps understanding where your contributions are going. Where's 12% of your total pay going every year? And what is like what is that gonna mean for you in 30, 40 years' time?

Aden 14:25

So that's I think that's a good point. So you mentioned like taking a bit of ownership and thinking where your super goes. What what are some of the different options, broadly speaking, for people? So you mentioned before there's self-managed, you might have the default industry fund, but what is that, what are your different options?

SPEAKER_00 14:39

They're probably the big extremes. So the the industry funds are there, uh they tend to have lesser investment options and be more chill on a lower cost. And then you've got your self-managed end where you're uh most people are highly engaged in making those investment decisions and they tend to cost a little bit more, they have to have their financial statements prepared every year and an annual return, and they have to be audited. Now every fund out there has to be audited, but when it's self-managed, you have to basically run with that yourself, and you you're the one that takes responsibility for that. And then you've got all the funds in between, which you guys are probably more um placed to talk about all of those, and in terms of what the different investment options and there's just so there's it's so vast these days uh from that perspective. So resting on your laurels and not taking some ownership or or just doing a little bit of research, people I think are missing out on some substantial opportunities there.

SPEAKER_01 15:36

Yeah. So well, an intro, an interesting piece. So yes, industry funds in the middle is sort of the retail funds, and that's kind of where we sit. So mostly if you do have an advisor, you potentially have access to the what we call a retail fund. It's different from a self-managed super fund in that you don't have to, the audit obligations, you don't have to get the financial statements prepared, but you do have a much broader choice of investment options than you do in an industry fund. And so we find that that can provide a lot of flexibility when you're in the stage where you're very engaged in your superannuation, perhaps making really large contributions and then beginning to draw down. Because from an industry fund, there's not such an option to select from where you're drawing from. Whereas in a retail fund, we can sell down one asset and keep another. So we just get a bit more flexibility, but not so much flexibility that you can have unlisted investments or property

Risk And Picking The Right Mix

SPEAKER_01 16:40

investments. So your retail funds sort of sit right in the middle there.

Aden 16:44

And I think the a good starting point, and as I always like to frame to people, think of superannuation as a tax structure. So initially you're thinking about what's the best structure to be using for this purpose. And then once you go through that stage, it's looking, okay, well, how do I take ownership? What's the right fit for me? Do I is it an industry, is it a retailer, is it self-managed? And then having the conversations with the right people to make sure you get to that outcome. Um, but I think a lot of people think of superannuation as a tangible object rather than think of it as just a tax structure within my personal financial affairs.

SPEAKER_00 17:15

That's right. And I think that a lot of people also think, oh, well, a self-managed fund is taxed differently to the other funds, and that's also not the case. They're all exactly the same tax structure. Now, I'll caveat that with there's some quirky funds out there that we haven't spoken about yet that have slightly different, but most, you know, the gener most of the population would have that that same structure. So a self-managed fund is not taxed any differently to a retail fund to an industry fund. It's just then looking at not only what are those investment options uh that are in there. But the other thing is uh that people should be considering is uh their insurance cover, because they might be slapped with default insurance cover, they're not aware of it, uh, it they think it's enough, is it enough? Like all of those sorts of things, that engagement and agency over their own super also leads down that path as well.

Aden 18:06

So where I want to move to now is a few myths around superannuation because there's lots that always come out, and particularly there's there's a few that are just so common that I'm sure you would have heard them all. And so what we'll do is I'm gonna say go through the myths and maybe you can both jump in and give it give your two cents. Is it a quiz? Is it a quiz? Um But so the first one is, and we've sort of touched on this a little bit, is that super only matters as you get closer to retirement. So, how often do you hear this or do you come across this, and what what would your counsel be to people that say that?

SPEAKER_00 18:34

I think less and less people are saying that, but it certainly is there. Again, like we've sort of addressed, uh, is that young people are thinking, well, it does only matter. Um, or I should only start caring about it uh down that path. But a decision that you make in your early 20s when you first have super, like Catherine mentioned, makes can make a world like hundreds of thousands of dollars, if not more, difference in 40 years' time. And yes, it's hard to have that sort of time horizon when you're a young whippersnapper in in your 20, and it's your first job out of uni and all those sorts of things. But yeah, a decision that you make early, that compounding effect that has is substantial.

SPEAKER_01 19:15

If you are going to be the sort of person who's gonna put extra money into your super, interestingly, you're only probably gonna think about that in your you know late 30s, 40s, 50s. If you thought about that in your 20s and just put some extra money in in the early days and then didn't do it in the later days, it would have a much larger effect because of that compounding. So actually, potentially, if you want to be engaged in it and you think you're gonna have a long lifespan, then the earlier the better.

Aden 19:41

And I think that probably leads into the next one in terms of we've mentioned the employer contributions that go in. And sometimes people might think, well, that's all being looked after for me, so I don't need to put additional contributions in or I don't need to be thinking about that. What would you say to that?

SPEAKER_01 19:54

I am shocked at my superannuation balance because I had zero interest in it until I started working at Capital Partners when I was 32. And I think then someone, one of the advisors, did a presentation to us to sort of give us some understanding of what it could grow to if we were putting in an extra little about amount per month. And I was like, I've got to be doing this because I love free money. And so I started putting in, I think I just said like an extra $50 per pay or something. And then every time I got a pay rise, it went up a little bit to a point where I was able to maximize my concessional contributions. I am, I'm just shocked, and I shouldn't be shocked because this is what I do for a living, but by how much it's gone up, and I feel like I could stop doing extra contributions now, and it will still be very sizable because just the growth on the amount that it is now. So just making extra contributions, A, it's tax effective for me personally, in my personal name, but the way that it has increased my balance is just not like way more than I would have expected.

SPEAKER_00 21:07

100% agree. I would also throw in there, however, that uh you can't access it for a really, really long time. And so when you are young, if you've got the capacity, even if it is $50 a pay, like that just makes a massive difference. But a lot of people then they've they they've got this the competing nature of I want to build something for the future, but also I want to save for a house and all that sort of so it's really hard to try and come up with that balance because if you're throwing money into super, you're getting a tax concession by doing that versus okay, well, I'll say I'll pay tax on the money and I'll save it for a house, or knowing putting kids through private education. So it's making those extra contributions really does make a big difference. It's just trying to manage that in light of other circumstances and other, you know, things along your your Your journey, your adulting journey.

Aden 22:02

Yeah, and I think that's a good point. That's one I've probably seen a little bit lately, particularly maybe for the more established families who the kids are going to private school,

Industry Retail And SMSF Choices

Aden 22:10

they've still got a reasonable mortgage on the house. And it's sort of that delicate balance of we know it makes sense to put money into super and there's going to be benefits, but we'd also like to make some progress on the debt, or we know the kids have got private school. So it is a really delicate balance. And I think that's part of the, I guess, art of being an advisor in terms of what's going to be the right fit for you and your family, um, knowing that you can't always get the perfect optimized financial outcome.

SPEAKER_00 22:34

And I think it's just, yeah, understanding what the trade-off may well be at some point in time. I am seeing people that towards that sort of all of those situations, you mean still some private school fees, still a mortgage, and it all comes down to are you going to get a better after-tax return by say putting into super and then you pull out of super when you're eligible to and pay off the mortgage? Like all of like it's a lot of I would say projections and numbers and spreadsheets, which I love, um, to to try and figure all of that out. And then ultimately giving someone all of that information so they can make that informed decision. And I think that's the one of the important things here with that engagement and agency. Yeah, and just being aware. So people be like, well, I've got to pay off the mortgage. Well, hang on. Are you actually better off perhaps having a balance of that with something else depending on your age, depending on what else is going on in in your life? So just being aware of that whole situation.

Aden 23:31

What about? So another myth, what about superannuation when you die? So maybe people might think I've got a will in place that'll deal with everything. What's what's unique about superannuation?

SPEAKER_00 23:39

Well, super it completely sidesteps the will. So the will can be completely irrelevant to the super. And there's been more and more litigation on this in recent times where uh someone within their super account, you can nominate a beneficiary through a binding death benefit nomination, and that's gone to a particular person who has to be eligible to receive it. And then everyone's thinking, oh, well, all that super will come into the estate and be dealt with there and be divvied up, and that hasn't been what's happened. So of course, people don't get what they expect, so there's legal um cases out there. There's been more so on the self-managed side of things only because uh the trustees are the are the members effectively. So and there's a lot of issues with relevant paperwork, so the importance of the documentation and the evidence. It's really well I I it's not enjoyable to read these cases, but they teach us so much about what not to do. And so it's um that's probably one of the biggest myths of it uh with respect to super is oh my will deals with it, and then that can be the the last thing that actually is is how it is treated.

Aden 24:48

Yeah, definitely. And then what about so this one we're probably getting more and more, particularly in light of the federal budget and the tinkering around different tax structures and rules. But there sometimes we get the question of well, the government's just gonna take my money or they're gonna change the rules. Why would I put that in if I can't touch it until this time? And they could change the rules. So how would you respond to that one, Catherine?

SPEAKER_01 25:09

I have to philosophically believe that the government needs to incentivize us to fund our own retirement or to save for our own retirement. I just don't think that uh the Australian government is able to pay a pension to everyone in Australia as they reach retirement age, and retirement age potentially then is going to have to go up and up. So it is really in their best interests and the best interests of the nation and the Australian people for us to be saving for our own retirement. And people are not going to do that unless there is some level of incentive to be putting money into superannuation. So, you know, absolutely it is nowhere near as favorable as it was 15 years ago. But it's still a lot more favorable than having money in your own name if you are on a, you know, on a tax rate or well, if you're earning income of above $45,000 a year. And then once you get into retirement at the moment, you know, you it's no tax within super, or if you are at that threshold where you are paying sort of 15% or getting into the realm of the new Division 296 tax, you can take that money out. So you don't have to have it in super. So I mean, I think none of us know what the government's going to do, but it seems there is a really strong reason for them to keep superannuation tax effective and uh and the people incentivized to use it.

SPEAKER_00 26:39

Pretty much all of I agree with what Catherine's saying there. The the challenge that we've had. So I reflect back on, you know, my time in practice and there's 10-year cycles. So the first big change to super came in 2007 from when I started my journey in the in the superannuation um realm, then 2017, and then now not quite 10 years, but pretty much bang on 10 years. And they were to make super very generous, and then it was it's been since then just really to pull it back. And so it's, I mean, there's four trillion dollars invested in superannuation in Australia. It's an extraordinary amount of money. But that also shows how well people have been using those incentives, and that's a pot of money that is then going to provide for these people in their retirement and for this dignified retirement, which is one of the objectives of super that they've put out there. So it's but again, people won't set that nest egg aside if they aren't getting a meaningful tax incentive for it. And I know a lot of people say, oh, a lot

Extra Contributions And Real Trade-offs

SPEAKER_00 27:50

of wealthy people are getting these tax incentives, but there need there needs to be a motivation there for people to do it. And that's probably what's been a bit disappointing with the changes that were announced in the federal budget this year. They actually made super more compelling. So before then, a lot of people with with high balances who might be subject to the new Division 296 tax, they were thinking, right, I'm actually worth more better off like pulling extra money out of super to fall below the relevant thresholds invested in a different entity. And now with these another another these announcements, rather, the it's more compelling to keep it in super because the biggest challenge for those people that are again at retirement age with these large balances is if you take that money out, the chances are you're not gonna be able to put it back in. And the longer term impact that that has from a like an overall wealth accumulation and tax management perspective is substantial. So it's it's quite an important and needs to be a well thought-out decision rather than acting rashly and saying, well, I'm gonna pull it out because the government's gonna tax it further, et cetera, et cetera. So it's it's not an easy decision to make.

Aden 29:02

So what I wouldn't mind doing now is getting into a little bit of the granular surround, like what are the actual rules around taxes, contribution caps, but I will cave it by saying that this is all general advice. So for any of the capital partners clients listening, obviously speak to your advice team before acting on anything, and any of our other listeners, just making sure that you're considering how it applies to your own considerations before making a decision. But let's start off with so we've talked about the tax concessions. What does that actually look like compared to, say, someone investing in their person age? So how does that work in super?

SPEAKER_00 29:33

So super, uh, whilst you're accumulating, so before you are retired or eligible to take money out because of retirement, then there's a pretty much a flat tax rate in super of 15% on income. And if an asset is sold and there's a capital gain and it's been held for longer than 12 months, there's a one-third discount. So there's effectively a 10% tax rate along the way. And once someone has retired and they commence what's called a retirement phase pension, there's a limit on how much you can have in that particular pension. But up to that limit, it's then becomes a 0% tax rate on the underlying earnings within the fund. So it's very, very generous when you compare to if someone had uh money in their own name and that generated dividends, you'd be taxed on them at their marginal tax rate, which could be up to 47 cents, including Medicare levy. And uh, because of the capital gains tax changes uh coming through from 1 July 27, a one-third discount on a realized gain in super, so effectively a 10% tax rate versus an indexed uh realized gain at your marginal rate, they're quite vastly um different. So that's a really one of the biggest incentive um along the way. Zero percent tax versus 47, if you think, on those extremes.

SPEAKER_01 30:51

I think people just don't think about that. Like I certainly didn't realise it as someone who was not part of this um, you know, world however many years ago that was, that you can get to your retirement and you can have investments earning income and you'll be paying no tax on that. Like that is so compelling.

Aden 31:12

And so we do quite a bit of financial projections or modeling work where we'll do, I guess, sort of like a trade-off analysis where you say, okay, well, if you keep the status quo or if you have your assets in this name, what does that look like? versus if you optimize it from a superannuation perspective. And you would have had lots of conversations, I imagine, Catherine, where people have gone, oh wow, that's a really tangible um benefit just by paying attention to that.

SPEAKER_01 31:34

Yeah, just because if you are making those contributions to super and therefore paying less tax along the way, that's just greater wealth accumulation. And so people will often want to have that money in their name because you can access it if you need it. But if we can show them, you know, based on all of the um all of the information that we have, the wealth that you currently have and what would go into superannuation, you actually aren't going to need to access that before you're eligible to, then there is a much stronger um reason to be putting that into super because the like um the compounding growth that you get over time, again, can be hundreds of thousands of dollars. I think you can break it down really simply to sort of say, all right, if I'm um someone who's on that um 39% tax rate, so including the Medicare levy, and I have an a hundred, I earn a hundred extra dollars. If that gets taxed in my name, I pay 39 cents and I keep $61. Tell me if I'm getting my maths wrong. So I'm very scared. But if I decide to put that $100 into super and claim a tax deduction for it, then my super fund does pay some tax. It pays 15%. But then $85 goes into my super fund instead of the 61% that I would have had in my name. So immediately I'm $24 better off. And that's huge, right? And so that $24 then grows over time and I keep doing that with my extra $100. And by the time I'm $60, I'd have more wealth just because of

Death Benefits And The Will Myth

SPEAKER_01 33:10

the tax differential.

SPEAKER_00 33:11

The other thing with that is the tax does um accelerate, like the tax difference gets accelerated as well, because if you've invested your $61 and you then pay tax on the income on the $61 at $39, then you've again got an incremental less amount reinvested as opposed to it being in the fund where it's only again at 15%.

SPEAKER_01 33:32

So $85.

SPEAKER_00 33:34

Yeah, exactly. If it makes um you love maths. Maths is always right. Uh so it it does, it makes a a really, really big difference uh from that perspective as well. The other thing that some people so they see super as I can't touch it until I reach retirement age. So when I get to, you know, 60 is that really first step. Um, and they have to not be working um in order to fully like pull it all out. But a lot of people don't see super, and you mentioned it earlier, about it being a structure and a tax structure. So it's you can you've got that agency and engagement available to invest it in a whole wide range of investments, obviously depending on the actual fund that you're in, but you can, you know, make it make a choice there as well. So you can't spend the money personally whilst you're accumulating, but you can invest it. So that is what a lot of people sort of don't necessarily they they see it as sort of a different pot, but it's part of the overall wealth. You are investing that, you just can't spend it. So that is another sort of change in the mindset a little bit as well, instead of saying, don't think of it as something that you can't touch, you can touch it to invest it, you just can't touch it to go and buy a boat or a holiday house or the like until you get to the correct age. But that the ability to invest it and then reinvest the proceeds. So some people say, oh, well, I want to invest in this particular asset in my super fund. Okay, off you go. Um but if uh if it goes gangbusters, I want to be able to use the proceeds to go off and buy a boat. Let's use that as my as my example. So in the fund, if you invest it, you you won't the tax rate you will pay on the return will be a lot less than outside. But then with those net proceeds, you really can't go and buy a boat unless you retired. So some people might then have that balance of, okay, we'll put some of it in outside super and some of it in. But again, understanding that it is a an investment and tax structure that you have like the ability to invest and you just can't access it to buy a boat.

SPEAKER_01 35:44

It's a very good myth that as it relates to self-managed super. People say, Well, I'll open a self-managed super fund and then we can buy that property down south and we can use it. Yep. And that is like that's not okay.

SPEAKER_00 35:56

That is not okay at all whatsoever. Yeah. So yeah, there's those those sorts of things as well that the I'll call you know, the barbecue talk of, oh well, I just, you know, rolled over and set up my own super fund. And we just bought a holiday house down south, and we're going down so like la la la, please don't tell me that.

SPEAKER_01 36:14

Or the oh well, we'll use the money in super to buy a house and then the kids can live in that also. Yeah. I know. Yeah.

Aden 36:21

Well, let's talk about contributions as well. So we talked about the benefits of money being inside super, but how do you actually get it in? So there's employer, there's additional contributions, and when when do you start talking to people about the contribution strategies?

SPEAKER_01 36:35

So two essentially, like the two fundamental ways to contribute to superannuation are what we call concessional contributions and non-concessional contributions. So concessional means that they're concessionally taxed. That includes your employer contributions, so the 12% of your salary that goes into superannuation, in as I mentioned before, instead of being taxed in your hands at your marginal tax rate, it goes into super and it's taxed at 15%. And that can be this financial year up to $32,500. So if your employer, you know, your employer contributions are only $20,000, then you can make a personal contribution of $12,500 and you can claim a tax deduction for that. And then that way you'll get a you know, a tax deduction in your hands and you'll pay 15% on that extra amount within the superannuation fund. So that's the tax effective way to put money in. There's also non-concessional contributions. So that's just your savings, money that you have, you know, received

Fear Of Rule Changes Explained

SPEAKER_01 37:40

from your salary and you've paid your full tax on, money that you've saved, money that you've inherited, money that you've won from the lotto, whatever it might be, you can put that into superannuation and the non-concessional contribution limit this year is $130,000. So those are the two ways. Non-concessional contributions, if you do have a really big windfall, you can bring forward an extra two years' worth of contributions. So say this year we're in financial year 27, so you could put in $390,000, and that would be your FY27, FY28, and FY29 contribution. So that's three years worth, and you wouldn't be able to make another non-concessional contribution until FY30. You can make a downsizer contribution if you're over 55, you sell your primary residence. There's a bunch of other, you know, you need to have owned it for 10 years, etc. But you can then put in another 300,000 to superannuation. There's small business. So there's a bunch of different ways to get money in, but your non-concessional and concessional contributions are the two main ways. And we would start talking to people about that as soon as we are meeting with them. Because really, to Gemma's point earlier, it is about affordability. Everything is a trade-off. Like if we're all just thinking about numbers, then we're all maximising everything that can go into super. But that does not take your life into account. And so, you know, you guys would know the first conversation we have with our clients is before we put a plan in place, what are we actually planning for? And then when we know what we're planning for, then we can figure out what is the right amount, can we afford to be making tax-deductible or after-tax contributions to superannuation and what is the benefit of that going to be in the long term? Because people are not really going to be committed to a plan unless they understand what they're giving up and therefore what they're getting in return and how it aligns with what they want for their life. I think that part of it is incredibly important.

SPEAKER_00 39:40

The other thing with the concessional contributions is where people, you might see them and they're 30 or they're 35 and they haven't topped them up. There are some great provisions to enable you to go back five years and top up what you haven't used of your contribution limit. And if someone has been out of the workforce for a period of time, that's about $170,000 with the current year's cap and the previous five. It's not quite there, but it's you know pretty close to it. And so that's substantial. And so with those windfalls, say someone has prioritized an investment property or building a portfolio rather than topping up their super and they sell some assets and they have a big capital gain, then this that's an avenue to try and manage that tax liability. That's potentially going to change with the budget announcements. Quite a few things are changing because of the budget announcements, but that's um again another option there for people to put money into super. And the other one that is so, and Catherine alluded to it, is this the the under the CGT provision. So there's small business capital gains tax concessions, which a lot of small businesses use. They are expanding out the thresholds for that, but again, that's something that's not happening right now, but will happen in the not too distant future. And there's some substantial amounts of money that people can put into Super if they're eligible for some particular provisions there. It's about $1.9 million per person. Now there's quite strict eligibility criteria for that, and that's to really acknowledge that a lot of people, their retirement has been their business and they've thrown every last dollar back into it, and they finally get a um a windfall or get some value for it. So their ability to put that um into super is is pretty phenomenal.

Aden 41:30

I think that's a really good point as well. We've talked a lot about paying attention to it earlier on, but for lots of people, life gets in the way, you've got priorities, but there is quite a few mechanisms that as you get closer to a stage of life where you've got a bit more financial flexibility, you have a windfall,

How Super Tax Beats Personal Tax

Aden 41:45

you come back to Australia from working overseas, there's still some really good opportunities to put bigger lump sum amounts into super. And I'm sure you said, and we definitely said, that's a big part of the planning for those people who have thought, okay, this is the right time to get advice. Um, but I hope I haven't missed out on all these opportunities previously.

SPEAKER_00 42:02

And I think that's where and and why the rules. So um again, I'll reflect on my career um pre-2007, um, and it was actually December 2006, I think the 7th of December. Is that anyway I remember? Ingrained in my um well, before that date, you could put however um much you wanted into super as a non-concessional contribution. There was no limit. But people didn't do that because uh on the back end it there was an element that was taxable when they were in drawdown phase. So in 2007, that was one of the biggest changes where they said uh if you're in drawdown phase, not only is the underlying income generated on your superannuation assets exempt from tax, so 0% tax, but if you're over 60, whatever you draw down, you are paying no tax on personally. Whereas before then there was a whole bunch, it was called a reasonable benefit limit, now it's called a transfer balance cap, but it was um there were different rules, and that determined how much tax was paid by you personally on your pension drawdowns. So that was uh that the generosity of of those changes was substantial. But obviously then everyone would have thrown loads of money into super. So that's when they started clamping down on what those contributions were. So it's um I can't remember the point I was trying to make, but you know, it's one of those things where yeah, being able to get a lot of money into super. And so there was that acknowledgement of people are overseas and away from the away from the workforce. Um and you know, if they're they're the ones who are the ones bringing up their their families, the ability to be able to top them up, I think, is is really, really important. And if you uh so the non-concessional contributions, if you're using that uh that particular the three-year cap, that's nearly 400,000 in one go, you can get into there. Even uh if you haven't used your concessional caps over time, that's nearly another 170. So there's some substantial uh Chunky amounts that people can put into super from that perspective. We do have to be careful that with the concessional contributions, they are taxed at 15 on the way in. And if you're a high income earner over 250,000, you do get hit with up to another 15% tax on what that concessional cap is as well. So it does start to narrow the tax benefit, but there still is by and large a benefit of doing so.

Aden 44:25

I think a really good point and what we see all the time is superannuation can be a little bit of a political football in terms of the rules changing and what that looks like. And probably last year was when most of the conversation around the the extra tax on amounts over three million, or what's that going to look like? We it was the division 29 and 6 tax. But Gemma, seeing as you sort of live and breathe this every day, where did where did that actually end up? Because we still get questions from clients from time to time saying, what happened there?

SPEAKER_00 44:52

What happened? Well, it was um it did like we not quite went full circle, but where we have landed is we do have a new tax and uh 1 July 2026 is effectively it the clock has started. So uh the first year of assessment will be the the current year, so FY27, 30 June 2027 is once that's been and gone and reporting starts to the tax office, then the first assessments will come through. So it's probably a good um point to raise is that this is a transitional year for these rules. So the rules have got originally it was like for high superbalances more than three million, but the biggest one of the biggest criticisms of the original rules was they was that they were going to tax unrealized gains. So they completely reversed on that, and there's no taxation of unrealized gains. It is only realized returns that will be taxable. However, they have imposed another threshold. So we've got the large superbalance threshold of the $3 million, and now a very large superbalance threshold of $10 million. So over three million, the returns generated, the extent to which you're over three million is taxed at 15%. If you're over 10 million, and this is your total superbalance, the extent, those earnings, the extent to which you're over 10 million is taxed at an extra 10%. So there's a potential 25% between those two, which is highly unlikely for many people because it is a proportion of each of those elements. So in the current year, it's a transitional year, so it's only going to be the closing balance that will determine the extent to which you might be in excess of those thresholds. From 1 July 27, it's the greater of the opening and the closing. So if someone starts the year at $12 million in super, so at 1 July 27, and then they decide that year to take a large withdrawal to perhaps manage their position or gift some money to children, whatever the situation might be, then if they finish the year at say $5 million, because they started at $12 million, $12 will be the benchmark, not the five. So that only applies from the 27-28

Caps Catch-up Rules And Downsizer

SPEAKER_00 47:11

year. So again, this is the transitional year from that perspective. The other thing is that to avoid the capture of the situation. So say I bought shares in my self-managed superfund 10 years ago for $100, and then at 30 June 2026, they were worth $1,000. So if I sell sold them for $1,000 now, I'm paying this new tax on that increase, and that's a bit unfair because it accumulated all prior to these new rules. So self-managed super funds are able to have what's called a cost base adjustment. So whatever the value of the assets in their fund are, they can like get the ruler out and draw that line in the sand and say, okay, the value at 30 June 26 is my cost base for the purposes of this new tax. And it's all or nothing. So you can't select different assets. It's just, okay, yes, you're making the election, it applies to everything. No, you're not. Off you go, it's going to be on the that increase since acquisition in the fund. So they're probably the big ticket items sitting in there. The way that the super that superannuation is taxed itself is not changing. So we mentioned earlier 15% tax on uh along the way whilst you're accumulating, um, 10% effectively on realized capital gains, and 0% on retirement phase accounts. So uh, but this is sort of all it's outside that because it's a tax that the individual will have to pay, but they can request that their superfund pays it in a nutshell. I've done like webinars of hours on this stuff, so it's highly complex.

Aden 48:52

Presented to our team, and I think it just sort of reinforces the importance of when you're making these big decisions, particularly around your structures and what you should be doing. Surround yourself with the right people, don't make rash decisions. I know when the legislation first came out, we had a conversation saying, call your jets, don't make rash decisions, make sure you're you're across all of the different details and how that applies to you and your family situation as well.

SPEAKER_00 49:14

And I and this is again, I say this is the transitional year of because you can pull money out and that will determine your closing balance, and that's gonna be the benchmark. But people might not be ready to make that decision. It's over a short period of time. And the one of the biggest things is that the budget, the budget announcements made super more super in terms of people were thinking, oh, well, this with this new tax, I'm gonna start paying like a nastier increment of effective tax. So maybe I pull money out of super and and divert it into another entity. But these all the other entities are starting to be a bit on the nose as well. So so which which one do you pick? Do you make a call and say, right, well, super, I'll I'll take a bit out of super and and put it into a company. Um, but then who's owning the shares in that company? So it's they're much wider considerations. And I mean, we all love a good spreadsheet, so I think the spreadsheet nerds amongst us are going to have an interesting year like projecting all of these things and trying to figure out, okay, these are your options. And you know, you mentioned it earlier, Catherine, so that people can make that decision. What's the trade-off? So if you do this, this could be the out like which one's better. Okay, well, that's incrementally better in 20 years, but a lot can happen over that period of time.

SPEAKER_01 50:31

And it also matters, we were I was talking about this for a client who's got a substantial amount in their super fund that's gonna take them over the you know very high range. And it like in terms of taking it out and putting it elsewhere, it's like, how much are we gonna be drawing down per year? Who are gonna be the beneficiaries? Um, how like what um what are their tax rates? There's just there are so many things to consider, and it's got a lot of it's got to do, again, with what is the plan. What do you want to achieve? What is the wealth for? How are you spending the money? Because if you're just gonna put it's really easy to model something where it's gonna sit in a bucket and stay there forever. But most people do still want to enjoy their money, and you know, there's gonna be some um buckets that might not get touched, but largely for the ones that are funding a family's lifestyle, deposit uh you know, house deposits for children, we need to have all of those considerations taken taken into account as well. And it's a lot.

SPEAKER_00 51:29

It's a lot. That's exactly right. And the other consideration that we're also not backing up against, but um looking at for people is that uh many of those who are impacted by this new tax, they they've been retired for 20, 20 plus years. So uh which is you know how fabulous, wouldn't that be nice? But they are starting to get older and they're they're thinking about who, like you said, what is it for? Who's going to be inheriting this and what what are the implications of whichever structure it might be in for that next generation? Is this an opportunity to say, okay, well, we don't really like you know Jimmy's wife or whatever, do we, you know, can we do we divert money away, or um we really like Jimmy's ex-wife and we want to make sure that they are looked after. So let's you know put some money across from that perspective. So the one of the uh privileges, I guess, of having um wealth and being old enough is that you can move a lot of the chess pieces around on the board, only that if you move it out, that chess piece out of super, your ability to put it back in isn't going to be there. So those just the any decision to pull big chunks of money out of super in the next 12 months or not quite 12 months now is really, really critical to have thought through all the pros, cons. Um, what's it for? What are the goals? What what do we really want to do with this before you know you push the pull the trigger on that?

Aden 52:58

So we've talked about a lot of the considerations with superannuation today, and there is a huge number of them. And I think it's really important for all of our listeners to know that you're not expected to be experts in this space. That's exactly what we're here for. Your team of accountants, lawyers, all the professionals you work with, are here to help you make those smart decisions. But Catherine, Gemma, what I will ask you to do is if you could give a message to our listeners around what are the one or two things you think they should be focusing on or prioritising with regards to superannuation that they might not be aware of or that people just might not have front of mind.

SPEAKER_01 53:31

I think the first thing that you need to do, particularly if you uh have an account that is not advised, is to look at the current investment mix. So make sure that it is appropriate to your age and stage of life. And if you're in your 20s or 30s, it's potentially you want to be in a really high growth phase. If you have gotten to a this is so common. I'm surprised we didn't talk about this earlier, but people get to the point where they've got three or four hundred thousand in super and they're like, oh, I've got so much in super, I need a self-managed super fund. So then they get a self-managed super fund and then they roll everything into cash and then they don't do anything. We see it so commonly with people with large amounts of cash.

Division 296 Update And Final Checks

SPEAKER_01 54:10

So it's taking some sort of action on what's there, and then it is just considering, particularly if you're um if you're young, is there an extra $50 or $100 per pay that you could be diverting to superannuation? So look at your figures and see because the overwhelming impact of that in you know your retirement is going to be something that you'll be very grateful for.

unknown 54:35

Definitely.

SPEAKER_01 54:36

What about you, Gemma?

SPEAKER_00 54:37

Uh I I think I'm gonna go right back to I think basics and just say be aware of what you've got in super and what is going in there now, because that even just getting the most out of that can have a substantial difference. So uh looking at if you are in your 20s, you're in the default option, which is probably balanced. So is that really the right place for you? A lot of the time it's not, because that's when in super, because you can't touch it for a long period of time, and because you're young, is where you can start to take a bit more risk. And then the other one is so checking the what what is your super? Do you have multiple funds out there? Like what is your balance? Trying to simplify things from that perspective, and again, just be aware. And another area that people um, which we I've sort of alluded to earlier, but we haven't really touched on because it's a whole thing in itself, is what insurances do you have in your super already? As a society, we're very underinsured, and so it's really, really important that people are aware of do they have um insurance and and super is a prime spot where it might be held. Is it appropriate? Most people don't understand what it is for, they just see it on their statement. Uh, and again, ask some questions about that and and look to again but back to just having a bit more agency and being a little bit more involved in that now and earlier can have um such a big impact over the the longer term. So just back to basics, what is your balance and what's going in there now, and just really you know honing in on that, and then you can really just expand on that from there.

Aden 56:17

Yeah, and I'd echo both your sentiments and the only part I'd add as well, and we're having some more of those conversations now, is for lots of our clients, we see it as a broader family engagement. So if you're having conversations with your kids or your grandkids, like how can they be paying a little bit more attention to this tax structure? And like you said, if there's an opportunity, we're in the position to be able to gift funds, like building that education so more of the next generation have an understanding of what superannuation is, what are the benefits, and just making really smart, deliberate decisions from an earlier point of view.

SPEAKER_00 56:49

And I think that's it. Smart, deliberate. So the deliberate is just having that agency and that engagement, just like really, really important.

Aden 56:56

So thank you very much for joining me. Gemma Sanderson from Cooper Partners, who's the guru in the self-managed superannuation space Australia wide, and Catherine Crasy, who's been our head of advice and an absolute guru in all things technical at Capital Partners. Thank you both

Key Takeaways And Closing

Aden 57:10

for joining me. As our listeners know, we love it when you share your feedback. Share the podcast with a friend, family member, or anyone in your network who you think would benefit from a listen. Gemma, Catherine, thanks for joining me.

SPEAKER_00 57:21

Thanks, guys.

Aden 57:22

Thank you for listening to another episode of the Purposeful Investor Podcast. Make sure that you share it with a friend or someone in your network who you think would benefit from having a listen. Both David Andrew and myself, Aidan Wilkins, are authorised representatives of Capital Partners Consulting Proprietary Limited, and we operate under the Australian Financial Services Licence 227 148.