Doctors generally spend many years training prior to commencing their professional careers. Concentrating on superannuation from an early age becomes very important in terms of the compounding nature of investing and the specific rules around superannuation. The small steps you take today to boost your super can have a big impact on your financial future.
Here are five important notes on superannuation that you, as doctors, will find helpful when organising your super plan:
Concessionally taxed environment
A major benefit of super is the low tax environment of 15%. Your concessional
(or taxable) contributions are taxed at 15% and all earnings on the investments within superannuation are also taxed at 15%. If you invest in capital assets within superannuation and those assets are held for more than one year and then sold the effective tax rate is 10%.
This is compared to an individual marginal tax rate of 47% for every dollar earnt over $180,000. The benefit of this tax rate is that the income after tax can be reinvested over many years until retirement thereby realising the benefits of compounding. Once you do “retire” your balance within superannuation (up to certain limits) is then tax free!
Annual contribution limits
It is important to note that there are annual contribution limits imposed on concessional (pre-tax) and non-concessional (after-tax) contributions. The current concessional contribution cap is $27,500 a year and non-concessional contribution cap is $110,000 a year (or up to $330,000 if utilising the three-year bring forward provision).
Unused concessional contributions
If you have unused concessional cap amounts carried forward from prior years and a total super balance below $500,000, you may also be able to make catch-up concessional contributions over a rolling five-year period which is up to $130,000 in tax deduction for the 2023 financial year.
Diversification
Diversification is the process of investing your superannuation monies across a range of investments and asset classes to receive returns from different sources. Diversification may help lower your risk, achieve more stable returns, and protect against the impact of individual investments or asset classes dropping in value.
Your superannuation money may currently be invested in Australian shares, international shares, property, cash deposits and other assets depending on your default investment profile, or if you have made your own investment selections. Most retail and industry super funds will allow you to choose from a range or mix of investment options and asset classes. Self-Managed Superannuation Funds (SMSF) offer a wide selection of choices and requires you as the SMSF trustee to prepare and implement your own investment strategy.
Choosing the most suitable option will typically come down to your attitude to risk and the time you have available to invest. For example, some people may choose to take on higher risk in their younger years with the potential for higher returns, but then adjust to low risk conservative options with lower returns as they get older.
Working out what your risk profile is and the right investment strategy for you at different life stages is the key to achieving maximum growth in your super. You may want to adjust your super investment strategy as you move through each stage of life, and as your circumstances change.
Borrowing within your super fund to purchase medical premises
For medical professionals, buying your medical practice premises in a SMSF structure is a strategy that is worth due consideration subject to your personal circumstances.
Through a limited recourse borrowing arrangement (LRBA), you can borrow money within your SMSF to fund the acquisition of the premises in the Fund, with the rental income derived from the property being used to service loan repayments and the property serving as security for the loan itself.
Limited recourse means that the lender’s rights are limited to the property, and they do not have recourse to other assets held in the SMSF in the event of a default. Any rental income earned, and any capital gains made on the sale of the property will only be taxed at a maximum rate of 15% within the SMSF which can provide significant tax benefits over the long-term.
When utilised fully and structured correctly, superannuation can help you reach your financial goals and approach retirement with confidence. If you would like specific advice tailored to your individual circumstances, please reach out to your advisor.
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