Author Topic: CASE STUDY: A Super Opportunity (Australia)  (Read 2213 times)

Reversifi

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CASE STUDY: A Super Opportunity (Australia)
« on: October 30, 2019, 09:28:38 PM »
Topic Title: A Super Opportunity? We didn’t plan it this way (for the haters we’ve had bad luck along the way) but my wife has the ability to put all her income into superannuation, tax free (for now anyway). This is a new situation that has only happened in the last year and has put us in a bit of as spin on how to structure things. This puts us in a different situation than a lot of How Tos for getting to FIRE. It means a lot of what I read might not work for us so I’m throwing this out to you lovely people for your input.

Life Situation
: Two DINKS, no kids to come, Age 47 Living Australia. We f#cked around a fair bit in our late 20’s and 30’s spent 5 years travelling and working overseas. We spent what we earned on travelling which might not be financially smart but the missus doesn’t regret it for a second. I work in an industry that is a bit boom and bust with high wages one year and under employment the next (mining). Wife has ended up in a full time permeant job in government so it’s about as stable as you can get. House is fully paid off, no personal debts. We both love to travel and not work so getting FI in the early/mid 50’s is a bit of a goal to aim for.

Gross Salary/Wages: Me $150k AUD, Wife $154k so total ~$300k AUD ($225k USD)

Individual amounts of each Pre-tax deductions
Short Answer:
Me: $14,500 super
Wife: $???? At least $14,500 (see below)
 
So this is where it gets interesting. I have my compulsory 9.5% super contribution ($14,500) but the wife has an old super policy in government that allows her if she wishes to put 100% into super and pay 0% tax (it’s 15% for everyone else) the catch is she will pay that 15% on the back end when she withdraws it (sometime after the age of 60). It has to be with the governments super fund (so no SMSFs).

Other Ordinary Income: About $20k a year from side passion projects (in declining markets so not feasible to turn them into full time gigs, it was 60k a couple of years ago for instance).

Qualified Dividends & Long Term Capital Gains: Moving our cash assets that were offset against an investment property loan into ETFs like VAS in my wifes name to get Franking divedends. Currently have $220k in mainly VAS but I have some VGS and VGE but I have some capital losses against my name from specie mining punts that tanked so I can offset another $30k dividends before getting taxed.

Rental Income, Actual Expenses, and Depreciation: Got an IP that gets $300 P/W. So around $10k a year into the account plus some depreciation. Living expenses when we last crunched the numbers was $75k a year

Adjusted Gross Income: Short answer: ~$230k
 Previously both on ~$135k a year we both paid $40k a year in tax with all money sitting in an offset so IP was positively geared so total adjusted $200k. Moving forwards, total is $230k with wife paying no tax at the moment and IP moved to negatively geared. Surplus cash put into stocks.

Taxes: 40k

Current expenses: Total annual living is $75k, house and cars owned outright. No loans except $285k on the investment property.
Assets:
PPOR $620k, IP $350 ($285k loan), Stocks $270k, Cash $130k, Super $500k, P2P Lending $20k
Liabilities:
Investment loan $285k Interest Only @ 3.75%
Looking to move to P&I @2.97% offered $285k PLUS up to $160k which I could potentially use for other investments (like a line of credit). Only can have offset against one account though. IP and loan is in both our names so Negative gearing benefits against the IP is reduced if my wife isn’t paying much tax.

Specific Question(s):
Short version: How to structure to be tax efficient?
Longer: In Australia we are normally restricted to $25k a year contribution in Super which is taxed at 15% when it goes in. My wife has an older “constitutionally protected” fund (Federal can’t tax State) so she can be paid into this fund and not be taxed (it gets taxed at 15% when we withdraw later on, including the profits). So with the caveats that it is only available while she works for our state government, we can’t pick super funds and we can’t access it until we turn 60 it seems a good vehicle to build wealth at this point in our lives. If she didn’t contribute 100% into super she would need to earn an extra $72k a year (~$210k) to take home the same money.
Taxes in Australia for income are 0% up to $18,200, 19% up to $37,000 then 32.5% to $90k. If she isn’t earning a wage (because it’s all going into super) any income would be measured against this. If there are franking credit these would be available for her to claim. So currently thinking.
Investment Property: Property price has devalued from when we bought it. Move it to a lower (2.97% P&I) and pull all the money out against it in the offset (it was the full loan amount $285k) and put that money to work elsewhere. It is currently making 10k profit a year $5k to me (taxed) $5k to my wife
Shares: 300k in VAS is her name. Assuming 5%(?)  dividends= $15k. Franking is .7 for VAS making and extra $3150.
Cash savings: Will reduce it to say $40k making interest $1200.
Wifes total income (ignoring $150k into super) for the year is  (5k+15k+3k+1k)= ~$24k
Tax on 24k income is ~$500
My income is after tax 94k for which 75k goes on annual living expense, leaving 19k a year for investing. I won’t be able to utilise franking credits so while my Wife is very Australian stock market heavy (VAS), I could buy more VGS and VGE to give a more balanced global exposure. I have 100k cash at the moment that could be VGS or maybe even some REITS (VAP).
So to summarise:
300K VAS (Wife with Franking credits)
100K VGS (Me no Franking credits)
20K VGE  (Me no Franking credits)

And maybe another 160K in VGS or some VAP?

Stop working sometime in our early 50s and have enough outside super to hold us over until we’re 60. (expense 75k a year)
I could also borrow as part of the new investment loan up to an extra $160k at 2.97% and put it to work in the stock market.  So IP and Line of credit would be $13k a year in interest ($22k total P&I). If my wife lost her job I’ve currently got a 19k a year buffer to cover shortfall and if I lost my job we could always dial back her contributions (seems like the paperwork takes 3 days to go through and then she’s paid next pay cycle).
« Last Edit: October 31, 2019, 01:47:07 AM by Reversifi »

deborah

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Re: CASE STUDY: A Super Opportunity (Australia)
« Reply #1 on: October 30, 2019, 11:26:44 PM »
I'm no expert, but just check with the super fund that what you're saying is actually the case. As of this year, funds need to have changed things so that people can catch up if they missed out on contributing to super. However, the catch up only starts on missed funds from up to a year ago (or something like that - I'm unsure of the exact dates involved). I suspect that your wife's fund may have changed their brochure to reflect the change, but not included information such as that only recent missed contributions can be caught up with. The legislated change also is only for five years of catch up, so you may want to check that too.

Reversifi

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Re: CASE STUDY: A Super Opportunity (Australia)
« Reply #2 on: October 30, 2019, 11:48:51 PM »
Thanks Deborah it's a good point.
We have sought paid professional advice to make sure we aren't fall foul of the tax man. It is a CPF (Constitutionally Protected Fund) which is quite different from a normal super fund and there are limitations which on professional advice we aren't breaching (my understanding is that these funds are all closed to new members nowadays). So this isn't about missed funds or catching up.   
More info: https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions---for-defined-benefit-funds-and-untaxed-funds/?page=6#Constitutionally_protected_funds

marty998

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Re: CASE STUDY: A Super Opportunity (Australia)
« Reply #3 on: October 31, 2019, 02:19:35 AM »
Currently have $220k in mainly VAS but I have some VGS and VGE but I have some capital losses against my name from specie mining punts that tanked so I can offset another $30k dividends before getting taxed.


Not sure what you mean here but you can't offset capital losses against ordinary dividend income.


Reversifi

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Re: CASE STUDY: A Super Opportunity (Australia)
« Reply #4 on: October 31, 2019, 02:42:40 AM »
Great pickup Marty998, I'll have to look into Tax Loss Harvesting further as it seems pretty straightforward for buying/ selling shares but I had assumed capital gains from dividends (and DRPs) would be included.