Real client story. Names and some details have been changed to protect our clients’ privacy. Figures were estimates at the time of advice and outcomes are not guaranteed. Every situation is different.
Andrew and Sylvia, 60 and 61, had spent their working lives building something solid. Andrew runs a metal fabrication business and Sylvia works part time in a pharmacy. They owned their home outright, along with a rental property and Andrew’s factory. Yet they had only about $50,000 each in super, because for years they had steered clear of it, unsure how it worked and not confident enough to commit. Retirement was close, and they wanted to know whether their plan would hold up.
Where they stood
Andrew earns $140,000 a year and Sylvia $40,000 a year. Their home is worth about $1,000,000. A second property worth about $1,000,000 sits in a family trust, with a cost base of $485,000, about $200,000 of debt at 7.14% and rent of $40,000 a year. Andrew also owns his factory outright. He bought it for $200,000 in 1989 and believes it is now worth about $600,000.
Their plan was to borrow $100,000 to add a granny flat to the rental, lifting the rent to $55,000, and to lease the factory for about $25,000 a year, which would also take the outgoings off their hands. They expected an income of $65,000 a year before tax, or $55,000 after tax, and planned to draw $100,000 from super to pay off the granny flat. They wanted to know whether it would work, whether to keep working until the investment debt was cleared, and what else could lift their standard of living.
What we found
We began with the life they wanted. After a long conversation, we settled on about $85,000 a year. That includes $20,000 a year for overseas travel in the first three years, easing to about $10,000 a year as trips closer to home take over.
Then we modelled their plan. With the granny flat and the factory lease, after-tax income came to about $35,000 each, or $70,000. But loan repayments of $17,380 brought that down to $52,620, and land tax, rates and insurance of about $9,000 took it to $43,620. Against their $85,000 target, that left a shortfall of $41,380 a year.
Holding the property in the trust also meant about $11,000 a year in tax on distributed income, which we estimated could add up to around $330,000 over their lifetimes. Selling was the obvious answer, but they were wary of capital gains tax. The trust property carried an estimated gain of $515,000, and the factory, if sold for $650,000, a gain of about $450,000. Before any discounts, that was $965,000.
What we did
First, we recommended selling the trust property at the start of the financial year in which they retire, for example on 1 July, so the gain would not stack on top of a year’s salary. With the 50% CGT discount, each of them would have about $128,750 of assessable income from the sale in place of $257,500. Because both had super balances under $500,000, they could use the carry-forward rules to make a deductible contribution of $100,000 each from unused concessional caps, bringing their taxable income down to $28,750 each.
On our estimates at the time, tax on $257,500 would have been about $91,692 each. After the discount and the contribution, it fell to about $2,580 each, plus $15,000 each in contributions tax inside super. That is an estimated saving of about $74,112 each, or $148,224 for the couple. They could then contribute $330,000 each as non-concessional contributions, lifting their combined super to about $930,000. Selling also gave them liquidity. You cannot sell off a bathroom when you need a lump sum.
Next, we turned to the factory. Andrew’s business met the small business tests and the factory was an active asset, so he could use the small business CGT retirement exemption, which allows up to $500,000 of capital gains over a lifetime to be disregarded when the amount goes toward retirement. We set up a self-managed super fund with a corporate trustee, at a cost of about $2,400, and the factory was transferred into it in specie. Inside the fund it can be leased or sold, and a future sale once the fund is paying a pension was estimated at the time to save around $400,000 in capital gains tax.
Finally, we started account-based pensions, which under the rules at the time paid them income free of tax, and invested in a balanced, income-focused portfolio that used Australian shares and hybrids for franking credits, with cash and bonds for stability.
The result
On the projections at the time, they had about $930,000 in pension accounts plus the $600,000 factory in their SMSF, a total of about $1,530,000. That was projected to fund $85,000 a year, indexed, beyond life expectancy, with an estimated $821,604 still invested after 30 years plus the factory. Moving into the tax-free pension environment was estimated to save about $22,000 a year in tax.
Several rules used here have changed since. Contribution caps have increased, and the 50% CGT discount is due to be replaced from 1 July 2027.
What we took from it
Andrew and Sylvia were asset rich and super poor, which is common for business owners. Their instinct was to hold everything to avoid tax. The numbers showed that selling at the right time, in the right order, would cost far less tax than they feared. In retirement planning, sequence matters as much as strategy.
If any part of this story sounds familiar, book a free 15-minute chat and we can talk it through. You can also read more client stories.
General advice only. This story describes advice given to particular clients at a particular time. It does not take into account your objectives, financial situation or needs, so consider whether it is appropriate for you and read our Financial Services Guide before acting.
Wealth Effect Group (CAR 424768) and Andre Dirckze (AR 395157) are Authorised Representatives of Boston Reed Pty Ltd, ABN 89 091 004 885, AFSL 225738.