Basics about Super – Are the Tax Benefits more Inside or Outside Super

I frequently receive inquiries about determining whether tax advantages lie within or outside of superannuation, and whether one should invest within or outside of a super fund. Transferring investments from outside your superannuation into a Self-Managed Super Fund (SMSF) can yield considerable benefits due to the tax advantages associated with super.

Investing OUTSIDE Super

For instance, consider investments held in your personal name valued at $300,000. If you fall under the highest marginal tax rate of up to 45%, this rate will apply to the income and capital gains produced by these investments, in addition to your regular income. Assuming an annual investment income return of 3%, you would earn $9,000, resulting in a tax liability of approximately $4,500 annually on this additional income at the top tax rate.

Moreover, if we assume that the investment value doubles every decade—a commonly accepted investment principle—the capital gains tax incurred upon selling would be around $67,500, calculated as 45% of the additional $300,000 gain after applying a 50% capital gains deduction. Even if you do not intend to sell the investment, it will eventually be sold, potentially by your beneficiaries after your passing, and the associated tax obligation will still apply.

Investing INSIDE Super (SMSF)

On the other hand, if you move the investment into your SMSF (keeping in mind certain restrictions) or purchase it using superannuation funds within your SMSF, the tax on the annual investment income would decrease to $1,350 per year, as the tax rate for superannuation is 15%. This results in a tax saving of $3,150 each year compared to the previous scenario.

Furthermore, once you begin drawing a pension, the tax rate drops to 0%, leading to a total annual tax saving of $4,500. It is important to note that there is a maximum cap of $1.6 million for the Pension Account, effective from 2019. Additionally, while in pension mode, there will be no tax on capital gains within your SMSF if the investments are sold after you start your pension. Over time, this can lead to tax savings that exceed $100,000, depending on the duration considered.

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