If the budget leaks are to be believed, there will be further changes to superannuation in next Tuesday's federal budget.
Unfortunately these continual changes weaken people's faith in the system ,and more and more people will start borrowing for investment instead of making additional salary sacrificed contributions to super.
Think about two people call Bill and Mary, aged 40 who want to put a wealth building program in place. They decide they can spare $10,000 a year from their gross salary. Bill decides to salary sacrifice $10,000 a year to super which means he will be investing $8500 a year after the 15% contribution tax has been deducted. If his superannuation fund earns 9%, he will have an additional $793,000 in his superannuation fund at age 65.
After taking advice, Mary chooses a different course and borrows $120,000 to invest in a quality share trust - the interest will be around $10,000 a year, tax deductible. If the trust earns 8.5% per annum , when tax is taken into account, she will have $998,000 at age 65 - an extra $205,000.
The reason for the difference is that Mary has got $120,000 working for her at age 40- it will be over 14 years before Bill has $120,000 working for him because he is only investing a net $8500 a year. Also, because Mary is investing outside the superannuation system, she is not losing access to her money.
Investing is like a game of Monopoly - the winner is the one who controls the most assets around the board. Borrowing for investment is still the best way for people to create wealth because the interest is tax deductible and there is no tax on capital gains until the asset is disposed of. This may be many years after they retire. A further benefit is that the capital gains tax is payable on just half of any gain once the asset has been held for 12 months.
Noel Whittaker is a co-founder of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org