written By Luis Sarmiento, mastech

Transcription

1 16 [ mastech ]

2 written By Luis Sarmiento, mastech One potential advantage of borrowing within superannuation is access to cashflows from super contributions which can be used to accelerate debt reduction or service a debt larger than would otherwise be possible outside of super. Additional cashflows inside super can originate from the Superannuation Guarantee or additional voluntary concessional contributions up to the concessional contributions cap. While voluntary concessional contributions can be stopped, the resulting cashflow outside super is likely to be significantly lower due to a generally higher tax rate being applied. The cashflow involved is not insignificant. The concessional contributions cap is currently $25,000 pa, representing an after-tax cashflow within super of up to $21,250 pa, with a 15 per cent contributions tax, or $17,750 pa with a 30 per cent contributions tax. This cashflow can be used to take a good chunk out of any loan, enabling it to be paid off more quickly. The same amount of income received as salary by a top marginal tax rate payer results in $13,375 of cashflow only. So, how does this help us decide whether to Pre-tax income pa Contributions tax after-tax cashflow difference Concessional contribution pa (post tax) enter into a particular borrowing arrangement inside super or outside super? Any benefit from the concessional taxation of super contributions can be separated from the where to borrow question, as long as the loan is not changing the client s super contribution strategy. In the case study on the following page we illustrate that whether borrowing inside or outside super, loan affordability is the key question, rather than simply looking at accelerated debt repayment as the only goal. However, if a scenario involves reducing a client s level of concessional super contributions to generate sufficient cashflows for servicing a loan outside super, you should be cautious and take into account the potential to introduce significant additional tax each year. The following table shows the after-tax cashflow difference of taking $5,000 pa as a concessional contribution compared to income outside of super. Income tax Post tax income pa Difference pa $5, % $3, % $2,675 -$825 $5, % $4, % $2,675 -$1,575 $5, % $4, % $3,075 -$1,175 $5, % $4, % $3,300 -$950 Conversely, borrowing inside super might prove to be the catalyst for a client to look at utilising more of their concessional contributions cap. In terms of any related tax advantages, arguably these should be accounted for separately given that the client would have the option to increase concessional contributions without entering into the borrowing arrangement. In the article A dissection of super borrowing in the last edition of Forward Thinking, David Barrett, Head of MAStech, discussed the pros and cons of entering into a borrowing arrangement inside super versus outside super. You can read this article at macquarie.com.au/ ftmagazine or by downloading the Forward Thinking app from the App Store. Macquarie Bank Lending Services is a referral-based lending service designed for financial advisers, planners and accountants who do not have their own in-house lending capability, but want to provide a high-quality lending offer to their clients. For more information see macquarie.com.au/mgl/au/ advisers/products-platforms/ mortgages/macquarie-banklending-services 17

3 [ case study ] Let s look at a 10-year projection, in which we compare borrowing inside versus outside super to purchase a property worth $650,000. We will assume that the client allocates $200,000 of capital, plus $15,000 pa of pre-tax income and compare the following three scenarios: Scenario 1: borrowing inside super with the $15,000 pa used to make concessional contributions Scenario 2: borrowing outside super with the $15,000 pa taken as salary Scenario 3: borrowing outside super with the $15,000 pa used to make concessional contributions net assets after 10 years $550,000 $500,000 Scenario 1 $450,000 Scenario 3 $400,000 $350,000 $300,000 $250,000 Scenario 2 $200,000 $150,000 $100, The projection shows that in net asset terms at the end of the period, borrowing inside super and making additional concessional contributions (Scenario 1) is preferred to borrowing outside super and taking the $15,000 pa of pre-tax income as salary (Scenario 2) by $81,158. However, most of this difference is due to the lower tax on concessional contributions, relative to the income tax applicable to funds taken as salary. If we compare Scenario 1 with borrowing outside super while still using the pre-tax income allocation to fund concessional contributions for investment inside super (Scenario 3), the difference falls to $10,144. This illustrates the importance of comparing scenarios with equal super contributions strategies when dealing with the where to borrow question. A full list of projection assumptions is provided on the following page. In practice the difference between any of these scenarios will depend on many factors, in particular the relative cost of any debt versus achieved investment returns (for both the property and the investment portfolio in super for Scenario 3). 18

4 [ case study assumptions ] Property purchase price: $650,000 Capital amounts: $200,000 up front, plus 15,000 pa of pre-tax income indexed to AWOTE (4.0% pa) paid at the end of the year Loan amount: $480,750 (non-super), $483,750 (super, includes $3,000 LRBA costs) Loan interest rate: 6.5% pa (non-super), 7.0% pa (super) Establishment costs (stamp duty, etc.) $30,750 SMSF LRBA additional establishment costs: $3,000 Ongoing costs (maintenance, etc.): $8,564 indexed to CPI (2.5% pa) Rental yield: 4.5% pa in year 1 growing at 3.5% pa Property value growth rate: 4.9% pa Marginal tax rate of individual: 46.5% inclusive of Medicare levy (non-super), 15% (super) CGT on sale of property: 23.25% (non-super), 0% (super, realised in pension phase) Investment returns (pre-tax, after fees): 2.81% pa income, 4.55% pa growth, 20% turnover pa Contributions tax rate: 15% All figures and charts are shown in today s dollars based on an inflation rate (CPI) of 2.5% pa Excess annual cashflow is used to reduce debt. Annual cashflow shortfalls are assumed to be funded at a cost equal to the loan interest rate (representing the cost of funds). Information contained in this article is general information only. [ Conclusion ] As long as the loan is not changing the client s super contribution strategy, any benefit from the concessional taxation of super contributions can be separated from the where to borrow question. Where a borrowing arrangement involves a reduction in concessional contributions, you should take into account the potentially significant cost of losing the associated tax concessions. As always, where the concessional contributions cap is not fully utilised and surplus income is available, increasing concessional contributions can be a worthwhile consideration. Apply for an SMSF Property Loan - and our $1,500 fee won t. For a limited time only, we re waiving the $1,500 application fee* on our SMSF Property Loans. Contact your BDM today for more information. *Applies to new loans that settle on or before 24 December This information has been prepared by Macquarie Bank Limited (MBL) (Australian Credit Licence (ACL) ) ABN for general purposes only and is not a suggestion to obtain credit, nor does it constitute the provision of credit assistance. This information does not take into account a person s particular requirements, objectives or financial situation. Before making a decision about whether to acquire a credit or lending product, a person should obtain and review the terms and conditions relating to that product and also seek independent financial, legal and taxation advice.

5 Disclaimer Macquarie Investment Management Limited (MIML) is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959, and MIML s obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN Macquarie Bank Limited does not guarantee or otherwise provide assurance in respect of the obligations of MIML. This information is provided for the use of licensed financial advisers only. In no circumstances is it to be used by a potential investor for the purposes of making a decision about a financial product or class of products. The information provided is not personal advice. It does not take into account the investment objectives, financial situation or needs of any particular investor and should not be relied upon as advice. Any examples are illustrations only and any similarities to any readers circumstances are purely coincidental. While the information provided here is given in good faith and is believed to be accurate and reliable as at November 2012, it is provided by Macquarie for information only. We will not be liable for any losses arising from reliance on this information. We recommend investors seek independent advice including taxation advice. Copyright 2012 Macquarie Investment Management Limited ABN AFSL