News 06/07

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

Minimise Tax - Move assets into superannuation

One of the challenges with the non-deductible contributions caps that apply is maximising use of the new limits and minimising tax when investments are transferred to a self managed superannuation fund. 

Between 9 May 2006 and 1 July 2007 it is possible to contribute up to $1million to superannuation from after tax contributions.  However, from 1 July 2007 a limit of $150,000 applies to after tax contributions.  For those younger than 65 it is possible to contribute up to $450,000 during a three year period.

For some, they may wish to take advantage of personal tax deductible contributions to help minimise the tax payable on the transfer of investments.

Unsupported personal tax deductions for superannuation contributions are available if less than 10% of a person’s income and reportable fringe benefits come from employment sources.  This applies to those who are self-employed, receiving income mainly from investments or receiving income as a pension from a self-managed superannuation fund

The maximum tax deduction that can be obtained for this financial year depends on the age of the person at the time the contribution is made. 
For anyone under 35 the maximum tax deductible contribution is $15,260, from 35 to 49 it is $42,385 and from 50 to 70 it is $105,113.  After age 70 no tax deduction is available for personal contributions.  However, from 1 July 2007 the change to the superannuation legislation will allow contributions to be tax deductible up until age 75 if work tests are met after a person reaches age 65.

Let’s look at a case study to see what we can do.

Case Study - Austin

Austin is 60 and works for two days a week as a self-employed music tutor.  This financial year he expects to earn about $15,000 p.a. from teaching.  Austin also has a share portfolio of $1M and this financial year will receive $43,300p.a. as dividends.

Austin has read about the proposed changes to superannuation, most of which apply from 1 July 2007 and he decides to make an in specie contribution of his shares to his SMSF fund.  The shares would be transferred via off market transactions.

Austin’s situation is as follows:

Value of Share portfolio                               $1,000,000
Purchase price of shares                                $400,000
Potential Capital Gain                                     $600,000
50% capital gains discount*                           $300,000
Taxable Capital Gain                                      $300,000

*all of Austin’s shares have been held for longer than 12 months

Strategy 1

One strategy for Austin is to make a one-off contribution to his SMSF by transferring all his shares before 1 July 2007.  He is eligible for a personal tax deductible superannuation contribution as his income from employment is less than 10% of his total income and reportable fringe benefits.  Austin could claim a tax deduction of up to $105,113 as he is older than 49.

So let’s look at his taxable situation:

Income                            Employment                           $  15,000
                                      Dividends                                $  43,300
                                      Taxable Capital Gain                  $300,000
                                                                                   $358,300
Less:
Tax deductible super contribution                                     $105,000*
                                                                                   $253,300

Tax Payable*                                                                 $  98,135

*tax includes Medicare, and is before deductions, rebates and franking credits
A tax deductible contributions of $150,000 has been used for ease of calculation

In addition, the SMSF will pay tax of $15,750 on Austin's tax deductible contribution.  Therefore the total tax payable if all shares are transferred to the SMSF before 1 July 2007 is $113,885 ($98,135 + $15,750).

Strategy 2

Rather than transferring all shares to the SMSF to the fund before 1 July 2007 Austin can further reduce his tax bill by moving the shares into his SMSF over a 4 year period. 

*tax includes Medicare, and is after the low income rebate, before deductions, rebates and franking credits

Austin would need to contribute to superannuation over the four years as shown in the following table:

Note:  Austin would need to meet the 10% rule for personal tax deductible contributions.

The reason Austin would need to contribute in this way is that the taxable amount of the capital gains he makes should be at least equal to the amount he can claim as a tax deduction in the relevant year.  It is also complicated by the fact that in 2007/08, 2008/09 and 2009/10 financial years the maximum after tax contributions that can be made to the fund are limited to $450,000 in total.

How Much Tax will Austin Save?

The amount of tax Austin is able to save over the four years depends on future personal tax rates which are yet to be determined.  However, if we use the tax rates for the 2006/07 financial year the estimated effect on Austin’s tax payable would be:

  
Austin’s case study shows that the new superannuation rules have great flexibility to provide a range of tax efficient solutions for wealth creation in retirement, particularly for those who may end up with large capital gains tax issues.  Depending on Austin’s actual circumstances from year to year there may be more tax effective strategies that can be used by varying the amount of tax deductible contributions throughout the four years.  For example, it may be more advantageous to contribute over a longer or shorter period.

One thing the new superannuation rules show is that it is critical to receive structural planning advice tailored to your own SMSF and personal situations to ensure that you make the most of the benefits available.