Superannuation has been the ‘go to’ tax effective option for high-income earners for decades but recent changes to superannuation law have forced many dentists to rethink their long-term investment strategies. By Jiyan Dessens.
Traditionally viewed as one of the safest options for savvy investors, superannuation has been raided in recent years with allowances for concessional contributions falling sharply from its $100,000 high under the Howard Government to just $25,000 per person.
Additional taxes specifically target dentists and other high-income earners, like the 2013 increase on tax deductible super contributions which saw those earning more than $300,000 per annum take a hit to the tune of 15 per cent.
Now, with the Abbott Government’s imminent changes set to cost tax payers an estimated $53 billion in retirement savings, Greg Lomax, CEO of Lomax Financial Group, is encouraging investors to be creative in regards to long-term wealth accumulation: “The talk about change together with the actual changes made has had the effect of making people a little wary of placing all their assets into super. This coupled with lower concessional contributions has drawn attention to the need to consider additional investment strategies outside of superannuation.”
Although evidently still a very important tool in the investor’s arsenal, the effectiveness of superannuation as a long-term strategy has been affected, forcing dentists to supplement their financial plans with alternative methods.
“The message is don’t just rely on super, and in particular don’t leave super too late,” says Terry McMaster of McMasters’ Accountants, Financial Planners and Solicitors. “Super should happen constantly over your entire working life and not be left until the last minute. The lower cap means dentists should not play catch up and leave super for later in life. It’s critical to start the super snowball as early as possible and as fast and large as possible, to maximise the compounding effect over your working life.”
Chris Wren of Highland Financial elaborates: “Superannuation strategies should be viewed for the longer term as a supplement or alternative income stream to what you earn whilst in gainful employment. Ideally, you do not want to have to take higher risks than you need to get a reasonable return. Every investor has unique goals and tolerances to risk. I think it’s important for all dentists to understand their risk tolerance before making any large investment decisions.”
The issue of analysing risk and determining which financial advisor to go with is an important one. With so many options out there and without knowing if certain planners have a conflict of interest, how do you find the right fit for you?
“You should clarify what fees or commissions you are paying for advice and what services you receive for those fees,” says a spokesperson for Industry Super Australia. “If they’re acting in their clients’ best interest, a financial adviser will be able to identify which superfunds deliver solid net returns over the long-term, without paying commissions.”
Chris Wren agrees that investors need to be careful when approaching unknown advisors, and adds that your plan should depend on your goals, strategy and discipline to follow a process: “There is zero point in recommending a particular investment option if it is not aligned with the dentist’s goals. The same applies to recommending a great strategy if the investor has little understanding of the asset class. In my book Financial Hygiene I have dedicated a chapter to ‘The mistakes most people make’ with their finances.”
In short, it’s important to do your research and ensure the financial advice you’re receiving is sound, without conflict and tailored to personal circumstances, goals and objectives.
Terry McMaster encourages dentists to consider a number of options in addition to super, making the point that long-term wealth accumulation strategies should be included in the management of your practice from the day you open your doors.
“Think about making large deductible super contributions of $25,000 a year every year from the day you start work to the day you retire, and perhaps even longer, employing a spouse or partner and superannuating them up to $25,000 a year every year too, or using a geared SMSF [self-managed superfund] structure to buy and hold good quality real estate.
“Other options include owning your surgery through an SMSF and paying a market rent to the SMSF as your landlord,” McMaster continues. “The rents are economically tantamount to extra contributions, and surgery premises are usually great SMSF investments.”
Greg Lomax of Lomax Financial Group agrees, also advising negative gearing in shares or real estate to supplement superannuation.
“Negative gearing strategies involve borrowing funds to purchase an income producing asset with the resulting income being less than the cost of the borrowing (interest). This shortfall or deficit is allowed to be offset against your other income for tax purposes and is very tax effective for those on the top marginal tax rate,” says Lomax.
“The strategy works at its best in rising share or property markets where significant capital appreciation can occur on the underlying asset,” he continues. “That coupled with the borrower being on the top marginal tax rate make the conditions for undertaking a negatively geared investment strategy quite compelling.”
All of these options are theoretically sound, but you always need to ensure the strategies you employ suit you and your family, and that the advice given to you isn’t riddled with conflicts. Chris Wren explains: “There are many components to successful investing that are way beyond the ‘tax savings’ and the promise of ‘high returns’… We can expect a major crack down on promoters advising on these strategies very soon and hopefully put an end to people profiting from advising investors to gamble their lifetime savings on high-risk asset classes.”
A sentiment echoed by the superannuation industry in general, with a spokesperson from Industry Super Australia saying: “Overwhelmingly Australians want impartial financial advice that is in their best interests and not tainted by sales commissions, ongoing advice fees, volume rebates or other types of incentives paid to financial planners by banks and other institutions.” ?
