This week we start uncovering the secrets to establishing a good superannuation plan.

Too good of an opportunity to miss . . .

For many people, superannuation is the only asset they will accumulate for retirement. For others, it is often ignored because of the view that they can’t touch it or use it until they retire, or have a fear about the complexity of superannuation.

There are two main reasons for making sure superannuation is a key component of your Retirement Plan:

  1. The long-term compounding effect of your earnings in a low and concessionally taxed environment will produce a much greater asset value at retirement in comparison to investing outside of superannuation.
  2. Superannuation provides protection to the assets invested in a superannuation fund, provided contributions have not been made as part of a plan for shifting assets out of the reach of creditors.

There are two types of contributions:

  1. Concessional contributions: where you get a tax deduction; and
  2. Non-concessional contributions: you don’t get a tax deduction

Concessional Contributions

When you make concessional contributions to a superannuation fund, provided the tax rate on the income is more than 15%, you will have a greater amount of capital to invest.

For example, if you have $10,000 of income and are taxed at 39.5%, you will have $6,050 to invest after tax. If you can structure your affairs so you can claim a tax deduction for contributing the same $10,000 to superannuation, you will have no tax to pay on this $10,000, and the super fund will pay tax of 15%, leaving you with $8,500 to invest within super.

Investing $8,500 of capital provides you with a larger asset base than $6,050. If your $8,500 was invested in exactly the same assets within superannuation as the $6,050 was invested outside of super, and made an income return of 4%, the superannuation fund would earn $340 and after tax of 15% would have $289 to reinvest. If the $6,050 was invested outside of superannuation, and the income returns were taxed at 39.5%, you would have $146 to reinvest.

Over a 10 year period of investing $10,000 of income in superannuation each year as a concessional (tax deductible) contribution versus investing in a tax environment of 39.5% outside of superannuation (assuming 4% income and 5% capital growth), the difference is:

Within Superannuation              $136,042

Outside of superannuation         $91,593

That’s a 49% higher value after 10 years by investing concessional contributions over the 10 year period.

If you sold this investment in 10 years time, and assuming that the capital gain was taxed at 39.5% outside of superannuation, you will be left with the following after tax cash amounts:

Within Superannuation              $133,003

Outside of superannuation         $85,255

That’s a 56% better after tax result.  But as an average return over 10 years, comparing the benefits of making concessional contributions and not making them, the difference is:

Within Superannuation              11.98%

Outside of superannuation          4.09%

So that means, by investing the same amount of income in superannuation in a tax efficient way via concessional (tax deductible) superannuation contributions, instead of investing it outside of superannuation, you will significantly increase the after tax value of this same amount of income invested.  This is a result of the compounding effect of a greater amount of capital invested due to tax savings.

Take advantage of the benefits of superannuation today. Call FWO Chartered Accountants on 07 3833 3999 or email info@fwo.net.au to arrange an appointment with one of our qualified advisors.