We own our own home. We have a SMSF. We purchased a commercial building that we lease for our business. We owe around $220,000 on that debt. We have shares around $50k. We have approx. $300k to invest. We are early 50's in age. We were thinking of personally contributing to our super fund and this would then pay off the SMSF debt saving interest. Is this a good strategy to take or should we be looking at investing in property and shares? Or should we salary sacrifice into our super and live off the cash we have and invest some of it into property or shares?
Lou Lou from Toronto in NSW
Top answer provided by:
Rodney Johnstone
Hi Lou Lou, a good question. We would need to ask many more questions to be certain of our advice being appropriate. Eg. How your business is structured, whose name is the home in, and its value? If the SMSF borrowing and lease payments all comply with the SIS Act regulations? What is the commercial property worth? What are your respective super balances and each of your income levels and sources, if you have children, what are your living costs, how long you want to work??? etc. etc.
However, in terms of your goals I assume that you are simply wanting to optimise your position and grow wealth for retirement. Given that you have a significant asset (the commercial property) within your own SMSF I would need to understand if that pushes you or your partner’s account balances close to the $1.6m cap for converting superannuation to pensions at retirement. If it does then for the investment funds you may be comparing funds in a 15% maximum tax on earning environment in retirement (super over $1.6m) with personal margin tax rates in retirement (if investing outside super).
In general terms, you are only able to make deductible contributions of up to $25,000 each. This would include any Super Guarantee payments plus any Salary Sacrifice payments. So, up to say $50,000pa combined and that results in $42,500 after a 15% maximum contributions tax. If done yearly this strategy would pay off the remaining debt in just over 5 years, possibly quicker if lease payments also reduce the loan. If your own income is significant, and you aren’t sacrificing money needed to meet living expenses, then salary sacrifice can be a good approach as it boosts retirement savings and lowers your income tax at the same time. The only thing is that superannuation contributions are locked away until you meet a “condition of release” after reaching your preservation age (the most common are reaching age 65, or retirement if below age 65).
You can of course also add your $300,000 directly into superannuation as an after-tax (non-concessional) contribution. The superannuation cap for this type of contribution is $100,000pa each but if below age 65 (as you are) you may bring forward two future years limits into the current year and add up to $300,000 each into your accounts (but then no more after-tax contributions for the next 3 financial years) i.e. if done today, no more until 2021. No contributions taxes apply. Adding say $300,000 in this manner could obviously help eliminate debt in the SMSF and leave say $80,000 to invest within the fund in other assets. Given you have the commercial property you may seek to diversify into non-property assets to suit your risk profile.
If you choose not to add the full $300,000 into super (but just make the concessional $25,000 each) then you will have funds invest in your own names. You ask if that should be into property or shares and that could be both if you so choose, but given that you have your own home and a commercial property you may want to diversify away from property and invest funds into other asset classes, where you can access money at any time and that might steer you towards shares or managed funds where a partial withdrawal or sale of shares can be achieved in a relatively short timeframe. This gives you flexibility as well as providing other growth assets in addition to existing property assets.
So Lou Lou, to sum up, if you have surplus income consider salary sacrificing to super but be aware of the annual $25,000 caps. If you are concerned about the debt in the SMSF make an after-tax contribution of say $100,000 each and those combined with a concessional $25,000 each will more than clear the debt. It would also leave you with say $100,000 to invest outside superannuation and it seems shares, exchanged traded funds (ETFs) or growth based managed funds might be a reasonable way to go for diversification, tax effective income and growth returns, and attractive liquidity if required before super becomes available. I hope this gives you some guidance for the decisions you need to make.
Regards Rodney.
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