As I mentioned in my latest portfolio update, we recently sold an investment property.
This gave us a fairly sizeable chunk of cash - around $300,000.
I’ve had a few questions around what exactly we plan to do with this money.
Will we invest all of it? Some of it? Will we invest it over time, or straight away? Will we pay down debt, add to our super, or something else?
So let me walk you through what my plans are and how I think through the tradeoffs in general - hopefully you find it interesting!
The welcome windfall
The property that we sold resulted in a capital gain of roughly $250,000 after selling fees and purchasing costs.
We’d held the property for over 13 years - it was purchased for a little under $500k and sold for a little under $800k. Because we’ve been paying Principal & Interest for the last 5 years or so, this boosted the sales proceeds.
This $250,000 capital gain becomes income for me to declare. But only half of this is taxable thanks to the CGT discount for owning longer than 12 months - so $125,000.
In recent years, I’ve crept into the 30% tax bracket - due to our growing investment portfolio and my writing income. But this capital gain puts me well into the 37% bracket and even into the 45% bracket!
At first, I didn’t think much of it. I just figured: “Hey, I made a bunch of money, that's great! I’ll just pay the tax and be on my way.”
But a couple of people asked me if I’d be adding to super to reduce my capital gains tax bill. So I looked into it.
Adding to super to optimise CGT
(Feel free to skip this short section if you’re well aware of how super (and catch-up contributions work)
As most of you know, Aussies can add to their super each year and claim a tax deduction.
The current limit is $30,000 for the financial year - that’s your ‘concessional contribution cap’. So if your employer puts in $10,000, you can add $20,000 of your own savings and claim it as a deduction at tax time.
Your super fund taxes your contribution at 15%. So if your personal tax rate is 37%,you’re saving 22%. That’s $4,400 on your $20,000 - a pretty tidy saving.
In addition, you can also tap into any unused cap space from the previous 5 years - also known as catch up (or carry forward) contributions.
In my situation, I’ve had zero employment income and haven’t contributed to my super whatsoever in the last 8 years. This means 5 years worth of unused super ‘cap space’ - or what amounts to roughly $130,000 or so (since previous years limits were lower).
So I thought, “Hmm, maybe I could add my $125,000 taxable gain to super, and pay 15% tax instead of 37-45%.”
My initial idea and what I learned
As much as I’d rather keep access to the cash, this move would potentially save me something like $30,000.
Unfortunately, it doesn’t quite work like that. Thanks to a new tax rule called Division 293.
Basically, if your assessable income and super contributions combined goes over $250,000, your super contributions will be taxed at 30% instead of 15%.
In this case, you’d only save 7-15% tax. Naturally, this makes it less appealing than my first assumption.
And it’s kinda strange, because even with the large capital gain I’m still under this income level. But to calculate whether this tax applies, the ATO includes both the capital gain AND me adding that money to super to measure whether this tax applies. Which feels a bit like double-counting.
Basically: Personal income + investment income + capital gain from property sale + super contribution… if total is over $250,000 = div293 applies on super contributions.
So, if I add any decent amount, it’s going to trigger this tax.
The sweet spot seems to be if you earn $150,000-$200,000 and can add up to $50,000-$100,000 (including employer super) as catch-up contributions so you don’t trigger the extra tax.
This will all be very obvious to those of you who’ve looked into super in detail. But I’m guessing many of you are like me and you haven't. So I felt like this was worth sharing.
The tradeoff
After learning this, it now appears the tax savings are something like $18,000. Which is still pretty good, but not quite as good as I thought.
Then I started wondering: is that benefit worth locking away a six figure chunk of money for the next 24 years? Some people think I’m mad for even debating it - LOOK HOW MUCH TAX YOU SAVE!!!
But I massively value access, optionality, control, and flexibility more than saving tax. So this isn’t an easy decision for me to make.
If I’d taken the standard advice of maxing out my super, there’s simply no way I would have retired before 30. Hell, I might still be driving forklifts right now and you’d have never heard of me.
And sure, maybe that means I end up with less money at 65… but do you really think I care? Having an extra 5 years of freedom in my 30s is worth far more than whatever I could’ve ended up with at 65 by way of compounded tax savings.
With all that said, for this particular chunk of money - roughly $130,000 - I’ve decided to add it to super and enjoy the still good but lower than expected savings.
“But wait, I thought you didn't like super”
This is false. My opinions on super are always misunderstood for some reason.
Maybe because it’s nuanced and situation-specific and the internet seems to have a difficult time comprehending that sort of thing.
It seems like if you’re not 100% pro super all the time for every person in any situation, then you must hate super for no reason and you’re being wildly illogical.
Super makes sense to focus on in a lot of cases, depending on your age and goals, but there are other times where it doesn’t.
As explained above, I decided not to add to super on my FI journey because I wanted to retire as quickly as possible - 30 years before the access age.
In the last 8 years since quitting my job, I haven’t added to super at all, for two reasons.
- Because my taxable income has been low
- Because I’m reliant on this wealth to sustain my lifestyle
In the last few years though, things have changed. Our investment portfolio has grown quite a bit and so has my personal income. This means two things:
- We now have more wealth outside super than we need for FI
- My current tax rate now means there are savings to be had by adding to super
As I like to call it, we’re now in ‘bonus money’ territory. FI is sustained and there is extra income/wealth beyond this.
Given we’ll be investing most of the surplus anyway (and spending some), super starts to make sense as a home for some of this money.
Plus, I’ve also recently tweaked my super strategy for what I think will be superior long term performance - as I wrote about here. So that makes it more appealing too.
That said, part of me is also a little cautious about the super environment in general.
I like super, but I don’t love it
Given there are now trillions of dollars in collective wealth held by Aussies inside this structure, super becomes a tempting honey pot for any government looking for extra revenue (tax).
I’ve noticed over the last 10 years that despite promises to make no changes, politicians seem unable to resist tinkering with it - often in ways to make it less generous.
And there’s a point to be made on taxing big balances at a higher rate. Most people don’t have a major issue with that, myself included. But certain people, again myself included, find that the overall uncertainty and ‘locked in’ nature makes it less attractive to put significant amounts of their wealth into.
Now yes, rules can change on any asset at any time. But at least outside super, you have way more control over what you then decide to do about it.
Plus, there’s also the sheer control and optionality of keeping money outside super. Higher personal investments mean higher borrowing power - which can be used for shares, or buying a rental property, or even investing in a business.
OK, so what about the rest of the money?
In practice, here’s what’s happening with the $300,000…
I invested roughly $100,000 in the week after receiving the funds. No waiting. And no second guessing about what the market might do. Just straight in there!
That left $200,000. The big chunk for super will sit in our offset account until June, when I’ll add it to my super and do 5 years worth of catch-up contributions.
Of course, I could add it sooner and ‘get the money working’ inside super. But it also gets taxed immediately inside super, meaning far less money working. That makes it more efficient to leave in the offset until as late as possible.
That leaves $70,000. And I’m also leaving this in the offset.
Why? Well, Mrs SMA has a property she’ll be selling in May of next year. She’ll probably add some money to her super too - though less than me given her lower tax rate and lower capital gain on her property.
Unfortunately, we can’t wait until we’ve got the money from her property sale, because that’ll be in the following financial year! So we’ll keep some of the funds from my sale for that purpose.
Mrs SMA’s catchup contributions will save roughly $12,000 - which is actually a better return per dollar than mine. That’s because she’s under the div293 threshold and doesn’t cop the extra tax.
If we ended up adding more to her super than what I’ve described, then the tax will get triggered and the additional savings would be minimal.
To simplify, by adding close to $200,000 to our super combined, we’ll save approximately $30,000. We’re still growing our share portfolio outside super, so money from future property sales will largely be invested there.
What about other options?
Of course, we could’ve also done the following:
- Kept cash for a future crash
- Paid down debt
- Added more to our shares
- Bought different assets
- A combination of 1-4
I don’t think any of those would necessarily be wrong. They just weren’t quite as appealing in this particular situation.
Speaking of debt, in my recent portfolio update I mentioned how I was looking to refinance our remaining three home loans.
Well, that’s all done now and our loans are now much cheaper cashflow-wise - to the tune of about $3,000 per month!
Our old repayments: $7,909/month
New repayments: $4,820/month
To get this, we refinanced to a different lender (ING, from AMP), got a cheaper rate, switched from P&I to Interest-Only, and reset our loan term to a fresh 30 years.
Yes, that means we pay more interest over the long run. But the surplus cash will be invested, earning a higher return over 30 years than our mortgage rate. I wrote about how much difference that can make here.
I’ve been wanting to do this for ages, so I’m thrilled it’s finally done!
Final thoughts
In short, we’ve invested a big chunk, and we’re also adding a lot to super - that’s how we’re allocating the $300,000.
Given we can only pull the catch-up contributions trick once, the plan with future proceeds is different. We’ll just pay the CGT and dump whatever proceeds we get into our share portfolio.
I don’t expect to keep a large amount of cash if we still have a monthly surplus. But things can always change, so we’ll see.
I hope you found this interesting and it helped you see how I think through these sorts of decisions.
Until next time, happy long term investing!
Dave’s best-selling book Strong Money Australia is available on Amazon. Listen to the audiobook on Spotify or Audible.
