My wife and I (both early 50’s) have $350K in combined super, own our house mortgage-free and have a holiday house we rarely use, worth about $650k. Should we sell the holiday home and use the proceeds to top up super and invest the balance elsewhere? We’d like to help our son buy a house in the next 5-10 years but also retire/semi-retire at around 60 years old.
Steven, Batemans Bay, NSW
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Great question, thank you!
I’ll break my answer down into different sections, as there are a few things to think about here.
Now holiday homes can make great lifestyle assets, as long as you get some good use out of them.
Or they can be rented out to provide a good income stream.
Either way it’s important that the asset is working for you, whether that be for lifestyle reasons or financial reasons.
If financial goals and long-term wealth creation is the priority, then creating an income stream (rent) and investing the extra cash flow or selling to top up some tax-effective investments (Super for example) may be appropriate.
Then come retirement there should be a larger mix of assets working hard for you, so you don’t have to!
Capital Gains Tax (CGT)
Whenever considering the sale of a large asset it’s important to seek professional tax advice, as there can be CGT liabilities depending on when the asset was purchased, how much it cost, any improvements made, etc.
Generally speaking, if the asset has been held for longer than 12 months, then you may have access to the ‘50% discount’ benefit within your tax return. For example, if you make $100k profit on the asset you may be able to reduce this down to $50k (which would then be included in your tax return as assessable income).
In the event of a CGT liability, there may be ways to reduce tax payable such as utilising tax deductible (personal concessional) Super contributions. However, you’re limited to certain caps ($25k per financial year each inc. SGC, but you may be able to use the ‘unused’ carry forward rule if available to you).
Superannuation is a great tax-effective investment vehicle and can create attractive income streams in retirement.
Once you’ve reached retirement (post age 60), you can have access to the 100% tax free ‘pension’ environment.
However, one downside to using Super in pre-retirement days is that you’re locking monies away until post age 60 (generally), so you need to be comfortable with that.
On top of the above mentioned $25k pa (personal concessional) caps, there are also personal non-concessional contribution (NCC) caps to put money into Super.
These caps are $100k per financial year, and if you haven’t utilised it already you can ‘bring forward’ the next two financial years’ caps and put $300k in at once (per person).
This can be a very handy way of getting large lump sums into super at once (or over two financial years if needed).
Helping your Son
Helping a child get into the property market can be a great idea to give them that initial kick-start, and one that would be greatly appreciated I’m sure.
There are generally no immediate issues around gifting or providing a house deposit while in your pre-retirement days, but once you are 5 years out from Age Pension Age (a long time off for you both!), Centrelink would want to know whether you have gifted any money or given away any assets over that 5 year period (which may impact Age Pension payments).
But if Age Pension isn’t a part of your future income streams (due to asset/income level for example), then there may be no need to worry!
The timeframe and the amount of the ‘gift’ would determine where to park the money and how to invest it.
For example, short term (0-3 years) may suit Cash & Fixed Interest type investments (lower risk but potentially lower returns). Whereas longer term (5-7 years +) may suit Shares & Property type investments (higher risk but potentially higher returns).
Before any strategies are put into place, it’s important to visualise how retirement looks.
Where will you be living? Are there any big-ticket items? (travel, cars, caravan etc) What level of ongoing income is needed to live comfortably?
Once questions like these have been answered, a personalised retirement road map can then be established to get you there unscathed!
At the end of the day, yes Super is a great structure to build your retirement wealth, but the main thing is that your overall monies are working for you.
That may mean ensuring that any assets you hold are generating a good income for you or are invested in a tax-effective manner to build long-term wealth.
As long as you carefully plan and compare different scenarios, you should be able to put yourselves in a strong position for the future, and in line with your goals, dreams and objectives.
I wish you both all the best, cheers!
Craig Holly (Financial Planner – Adelaide)
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