I am business owner and I am questioning my accountant’s advice.

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Q. We are business owners and our accountant has us pay a designated amount into super each month. We are reluctant to do this at the moment and have that amount lose money immediately when banks are offering over 8%. Should we try to delay these payments?

Josie’s answer: I am finding that many people are asking similar questions. Why put my money into superannuation when they might get a higher return by investing in a cash management account or term deposit outside of super. This is where a little research and homework will make it a lot clearer and thank you for asking this great question.

When thinking of superannuation, do not think of it as an investment. This is a common mistake. Superannuation is simply a trust which offers amazing tax concessions. For example, if you had a family trust, would you be asking the same question? Probably not.

Firstly, I will discuss the tax benefits. Lets say your monthly contribution to superannuation was $1,000 (gross) and your personal rate of tax was 30% (applies to anyone earning between $30 - $75K for the 2007/08 year). At the moment you are thinking about investing in a term deposit rather than your super fund.

This decision will cost you dearly because the tax on entry to your superannuation fund is 15%, so your ‘investment in super’ after the 15% contribution tax is deducted would be $850.00. However, if you decide to invest outside of superannuation, the tax man will deduct 30%, i.e. $300, so you net investment in the term deposit will be $700 (plus Medicare of 1.5%).

You have effectively given the tax man an extra $150.00. Furthermore, once your funds are invested in a superannuation fund, the maximum tax you will pay on the earnings will be 15% (a lot less if you receive franking credits from Aussie shares – a subject for another day!).

The second issue to think about is that the majority superannuation funds offer investment choice, usually at least a dozen. If your investment is volatile at the moment it is highly likely that you have exposure to international and Australian share investments.

You are not obligated to keep investing in this asset class and may be able to choose a safer option e.g. you can direct 100% of your superannuation contribution be deposited into cash type investments which never go down.

However, there is an old saying - ‘the higher the risk, the higher return’ and vice versa. In other words, you might prefer to invest your money in cash style investments because they seem ‘safe’ but over a long period of time you might be doing yourself a disservice.

As a general rule, growth investments, such as property and shares have outperformed cash and fixed interest and I am referring to historical information, and over a 20 year plus time horizon.

Of course I can’t finish this blurb, without highlighting the importance of diversification. In other words, it is very important to spread your investment and ‘not put all your eggs in the one basket’. I think that is enough of my clichés – oldies but so true.

To sum up, and without knowing your personal circumstances, if your tax rate is 30% plus, you are probably better offer directing your hard earned dollars to a superannuation fund (assuming you don’t need it for a while, plus there are plenty of other issues which I don’t have time to discuss today), rather than a term deposit outside the superannuation environment.

Perhaps you just need to look at all the fees and charges in your superannuation fund and put a bit of time into researching the investment options.

I am also assuming you don’t have a self managed superannuation fund, as these give you total control of where you want to invest. Again thanks for your question, which I really enjoyed answering. Hope it all helps and wishing you happy money organisation.

Josie Kay (please take particular note of my disclaimer).

Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. Thanks for posting your question on www.askjosiekay.com.

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Here’s what some of our satisfied readers have said about Ask Josie Kay.com -

wow……you did answer my question just like the radio said…….many many thanks you have given me much to think about, your answer is precise, understandable and very thought provoking.

Wish there were more like you in this world; it might be a better place to do business!!! Thanks again.

barb

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