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Can You Use Superannuation To Pay Off An Existing Mortgage?

by | Jun 28, 2022

A relationship has been established around superannuation and mortgage debt that could impact the stability of your retirement.

As prospective Australian retirees approach their preservation ages and retirement, those who are yet to own their own homes may struggle to maintain a comfortable retirement. Retirement plans often work out a prospective financial situation, assuming that an owned home is an already existing asset.

Housing is quickly becoming a critical aspect of retirement, alongside the pension, super and voluntary savings as the main means of ensuring a comfortable retirement for future retirees.

Mortgage debt and the threat of continued payments to pay it off is something that workers must now take into consideration when looking into their retirement, as Australians struggle to pay off their homes. Can it be paid off without the extra income earned from their work?

As more and more Australians retire with healthy superannuation balances, the allure of using that money to pay down a mortgage is strong.

Factors that may be affecting retiree’s mortgage debts could include:
Higher property prices (now ten times the average wage as compared with three or four times two decades ago).
A delayed entry into the property market as they save for a deposit, leaving fewer working years to pay off the loan.
Relatively low-interest rates – currently, every dollar used to pay down a mortgage is saving less than 3% on interest, while in superannuation that same dollar has the potential to return 7 or 8 per cent.

Paying down a mortgage is a growing problem for retirees who are increasingly leaving the workforce with mortgage debt, which is far from the norm among middle-income Australians as recent as a decade ago. Among retirees, homeowners in the years prior to retirement (ages 55-64) had dropped from 72% in 1995 to 42% in 2015-16.

However, those who began their working careers prior to the 1990s face another challenge as they move closer to their preservation age; the superannuation guarantee was only introduced in 1992, which means that many may have accumulated less superannuation than other generations after.

It is understandable that for those approaching retirement, preferencing super over mortgage could seem like a logical move, as the extra funds generated can be diverted back into property on retirement. Using superannuation to pay a mortgage can make some tax sense – in an assets test for the Age Pension, a primary residence is exempt while superannuation is not.

This may become a more common approach for retirees and those looking to retire within the next few years. However, you should consider what the best approach is for your situation, and whether paying off the mortgage with your super is worth it in the long run. Consulting with our team before taking any action should be your first step in this process.

  • Why Are My “Connections” Important To Know During Tax Season? - In the realm of tax law, a critical concept revolves around understanding the notion of "entities connected with you." This…

    In the realm of tax law, a critical concept revolves around understanding the notion of “entities connected with you.”

    This concept serves as a linchpin in several aspects of taxation, from determining one’s status as a Small Business Entity to ascertaining the value of assets when seeking eligibility for Small Business Capital Gains Tax (CGT) Concessions.

    Furthermore, it holds significance when an individual has sold an asset and claimed it was used by an ‘entity connected with them.’

    In various tax scenarios, having an entity connected to you can either prove beneficial or burdensome. A prime example of the former is when you sell a factory unit, and a company affiliated with you operates a mechanics business within that unit. In this case, you become eligible to claim the Small Business CGT Concessions on the sale of the factory unit, potentially leading to substantial tax benefits.

    Conversely, connected entities can have adverse consequences, particularly in specific asset tests. When evaluating certain asset-related criteria, the value of assets connected entities hold is aggregated with your own. Consequently, in such situations, having entities connected with you may not be advantageous.

    Consider a scenario involving a family trust and a distribution made to the adult daughter. In this instance, her assets may need to be added to the overall asset pool when determining your eligibility for tax concessions. A key threshold for determining connection to a trust is if an individual has received 40% of the income or capital of that trust in the preceding four years.

    Entities controlled by the same person or entity are also considered connected with each other. For instance, if you oversee two trusts, those trusts are not only connected to you but also to each other. This interconnectedness has implications for tax planning and assessment.

    Remarkably, spouses are not automatically deemed connected to each other in the eyes of tax law. This is not the default assumption, and typically, spouses are not considered connected entities. For instance, if you are in control of a company, and your spouse independently manages their own separate company, they would generally not be considered connected to each other. The implications of this can vary depending on the specific tax scenario.

    While the concept of entities connected with you may seem intricate, it is a dynamic factor that necessitates ongoing attention and evaluation. Circumstances surrounding the connections can change over time. Returning to the example of the factory unit, the nature of its disposal could alter the connection dynamics. For instance, you may have retained ownership of the factory unit while transferring ownership of the company to your son five years ago. In this case, the company is no longer connected with you, potentially affecting your eligibility for specific tax concessions.

    Understanding and managing the relationships between entities and their connections is pivotal in navigating the complexities of tax law. It is not a static concept but one that requires ongoing consideration, as changes in these connections can have significant implications for an individual’s tax obligations and eligibility for various concessions.

    Therefore, individuals and businesses should remain vigilant and seek professional advice when dealing with entities connected with them in the realm of taxation.

    Keeping us apprised of your plans for your assets and of changes that could impact your connections means we can ensure that you do not inadvertently miss out on any of the tax concessions available.

    Disclaimer for External Distribution Purposes:

    The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. The receiver of this document accepts that this publication may only be distributed for the purposes previously stipulated and agreed upon at subscription. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

  • Your Health Has A Place In Estate Planning: What You Should Consider If You Fall Ill - When estate planning, most people focus on what will happen to their family and their assets after they pass, often…

    When estate planning, most people focus on what will happen to their family and their assets after they pass, often neglecting to consider what would happen if they were to become ill or incapacitated.

     

    Falling ill can be a very stressful and traumatic time for you and your family, especially if you are the primary financial provider for your household. Taking the time to become prepared and evaluating your financial situation can help you to future proof if you are out of work for health reasons. It is essential to ensure you know of every entitlement available should you become sick or incapacitated.

     

    Income Protection:

    Income protection is a form of insurance that pays you a regular cash amount if you are unable to work as a result of a sudden illness, covering up to 75% of your income for a set period of time. You can insure your income through agreed value, where you decide the amount you wish to receive each month, or indemnity, where you prove your income at the time of claim rather than during application.

    Generally, you can claim part or all of your income protection insurance premiums that are taken outside of your super as a tax deduction, helping you save more on your tax bill. However, you are not entitled to deductions for a policy that compensates for a physical injury. Other insurance policies include health insurance, trauma cover or total and permanent disability (TPD) insurance.

     

    Incapacity plan:

    Incapacity planning is a process through which capable adults make choices and plans about future events that are a possibility. It addresses what you would want to happen in relation to health care decisions and financial matters should you lose your ability to make or express choices.

    In the event you are seriously injured or develop an illness such as dementia, you may not be able to pay bills, file taxes or manage your assets and investments. Incapacity planning allows for those types of things to still be done by someone with the authority to handle them. An incapacity plan should contain the following documents:

    • Living Will: states what kind of health care you wish to receive or refuse to receive, should you lose consciousness or capacity. Unlike a last will and testament, your living will has nothing to do with what happens to your property after you die.
    • Financial power of attorney: allows you to choose someone who will have the legal authority to manage your financial affairs if and when you lose the ability to do so yourself.
    • Medical power of attorney: allows you to choose someone to have the legal right to make medical choices on your behalf if you cannot make them on your own. You should discuss your wishes with the chosen representative before you are incapacitated and they need to make medical decisions.

    Early release of super:

    There are very limited circumstances in which you can access your super before you retire. You may apply for early release on the grounds of:
    • Incapacity: if you suffer permanent or temporary incapacity.
    • Severe financial hardship: if you have received Commonwealth benefits for 26 continuous weeks but are still unable to meet immediate living expenses.
    • Compassionate grounds: to pay for medical treatment if you are seriously ill.
    • Terminal medical condition: if you have a terminal illness or injury likely to result in death within 2 years, as certified by two registered medical practitioners, at least one of whom is a specialist.

    Disclaimer for External Distribution Purposes:

    The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. The receiver of this document accepts that this publication may only be distributed for the purposes previously stipulated and agreed upon at subscription. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

  • Superannuation-Related Obligations Employers Need To Keep In Mind - While the hustle and bustle of operating and managing a business can occupy your mind, it’s important not to forget…

    While the hustle and bustle of operating and managing a business can occupy your mind, it’s important not to forget your superannuation obligations to your employees.
    Those who fail to meet their super obligations risk facing severe and even damaging liabilities, penalties and even potential imprisonment. Are you aware of your obligations?

    Employees (after entering the workforce) should have a ‘stapled’ super fund that you must pay their super into or the right to nominate a super fund. However, if an employee is not eligible to choose, does not have a fund or fails to notify the employer, the employer must pay their contributions into an employer-nominated or default fund.

    The employer-nominated or default fund must be a complying fund (meets specific requirements and obligations under super law) and be registered by the Australian Prudential Regulation Authority (APRA) to offer a MySuper product.

    Some super funds may ask that an employer becomes a ‘participating employer’ before they can pay contributions to them. Participating employers may have to make super payments more frequently, such as monthly instead of quarterly.

    For example, you need to make sure that you are meeting the super guarantee contributions now for all of your employees, including those who would have previously fallen under the $450 threshold.

    Before 1 July 2022, employers who paid their workers $450 or more before tax in a calendar month had to pay superannuation on top of the employee’s wages. Now super must be paid on any payments you make to domestic or private workers if they work for you for more than 30 hours in a week, regardless of how much you pay them.

    The minimum amount of superannuation that an employer must pay to their staff in Australia is called the superannuation guarantee (SG).

    Under the superannuation guarantee, employers have to pay superannuation contributions of 11% (from 1 July 2023) of an employee’s ordinary time earnings when an employee is: over 18 years, or. under 18 years and works over 30 hours a week.

    Currently, it must be paid at minimum four times per year, but from 1 July 2026, employers will be required to pay their employees’ super at the same time as their salary and wages. This will be known as ‘payday super’, as more consistent contributions will mean that superannuation funds should be better able to increase their compounding potential.

    Employers can claim a tax deduction for super payments they make for employees in the financial year they make them. Contributions are considered paid when the employee’s super fund receives them.

    Missed payments may attract the SGC (superannuation guarantee charge). While the SGC is not tax-deductible, employers can use a late payment to reduce the charge or as a pre-payment of a future super contribution (for the same employee), which is tax-deductible

    Have concerns about your obligations as an employer when it comes to super? Why not have a chat with one of our team members, who may be equipped to assist you in this matter?

    Disclaimer for External Distribution Purposes:

    The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. The receiver of this document accepts that this publication may only be distributed for the purposes previously stipulated and agreed upon at subscription. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.