Strategy #2 - Wealth Accumulation
A detailed cash-flow analysis was completed, and we quickly realised that Michael had a further $12,000 in surplus cash flow per annum to invest with. He also had some equity available in his current properties.
Some more numbers were crunched, and we found that he could purchase 2 more properties and the ongoing cost of holding them would not exceed $7,000 per annum.
This was achieved through the rental income he would receive, the standard property investing tax deductions, and some shrewd tax planning decisions from our many years of experience.
A managed share fund was also created for Michael to make regular contributions into. This provided him with diversification and liquidity should he ever need quick access to his money.
The compounding investment growth on the regular contributions he made would also go a long way towards building his wealth quickly.
Strategy #3 - Set Up An SMSF
The low amount of funds in his super presented a very real problem for when he retired. He also wasn’t taking full advantage of the low tax environment available to him in super.
Michael started making regular contributions to his super, and when the fund reached a balance of $250,000, we set up a Self-Managed Super Fund. This would give him greater control over what he invested his super in, and more importantly, he could now truly diversify with property.
He used some of that balance to cover the costs of purchasing a property (inc. deposit and fees) and borrowed the remainder. This increased his super value from $250,000 to $700,000 overnight. The key here is he now had significantly more money compounding any annual growth in his super fund.
- 14% annual growth of $250,000 is $28,000
- 7% annual growth of $700,000 is $49,000
As you can see, at even half of the annual capital growth rate, his return is almost double due simply to leveraging his super balance into the Australian property market. The rest was poured into high performing Exchange Traded Funds.
The property investment tax deductions he received from within the SMSF almost cancelled out any tax the SMSF would normally have to pay, lowering the effective tax rate of the fund into the single digits.
The long-term benefits are even greater.
When the SMSF is in pension phase, there is no tax paid on the income produced by the fund, and no Capital Gains Tax is paid either (CGT exemption is currently capped at a certain amount). This will potentially save him hundreds of thousands of dollars in taxes he would otherwise have to pay
