“IT JUST DOESN’T GET ANY MORE (TAX) EFFECTIVE ..”
With an ageing population (and the unprecedented political clout of the ‘baby boomers’ generation), successive governments have ensured Superannuation is extremely attractive.
In fact over recent years superannuation has become so tax effective, that strict limits now exist on annual contributions levels (both concessional and non concessional).
Amongst other benefits, the current ‘simplified superannuation’ framework (introduced in 2007) enables;
- Transition to Retirement (TTR) pensions to be drawn from superannuation from age 56yrs while the member continues to be employed (allowing additional tax effective ‘salary sacrifice’ into the super fund)
- Generally income generated inside superannuation is only taxed at 15%. However from age 56yrs, and assuming a TTR pension, all income generated and allocated to the account of that member is tax free
- Capital gains generated inside superannuation are normally taxed at 10% (assuming investment held for 12months), but again from age 56yrs capital gains inside superannuation are tax exempt
- From age 60yrs pensions from the fund to the member are completely tax free
- ‘choice’ exists so that members can easily and cheaply ‘roll’ existing superannuation benefits, and compel employers to contribute, to any superannuation fund of their choice. This could be their own Self Managed Superannuation Fund (SMSF)
Additionally, other than in extremely limited circumstances, benefits inside superannuation are not available to a trustee in bankruptcy. Accordingly monies/investments inside superannuation offer almost pure ‘asset protection’.
SELF MANAGED SUPERNNUATION FUND (SMSF)
The compelling asset protection and tax benefits outlined above, combined with the ability to establish a Self Managed Superannuation Fund (SMSF) which can now borrow to purchase commercial property has resulted in the SMSF becoming a critical element in optimal tax efficient trading or investment structures for many of our SME business clients.
Further, for new clients, a straight forward restructure has often saved many thousands of tax dollars annually going forward.
- Jim and Sue are both > 56yrs of age (Jim 60yrs , Sue is 56yrs)
- They have $300K (combined) in industry superannuation
- They run a small business which has a net taxable profit of $100K (and no other taxable income)
- They own the commercial premises in which the business is operated which has a market value of $500K
- They own a house worth $1Million with a private mortgage (non tax-deductible) of $500K
- Although still working they can commence a ‘Transition to Retirement Pension’. At that point their superannuation account enters ‘ Pension Phase’ and all earnings and capital gains are completely exempt from tax
Jim and Sue could set up a SMSF, roll their existing industry superannuation ($300K) into the SMSF, and borrow a further $220K (tax deductible interest within the SMSF) to cover balance of purchase price plus stamp duty/incidentals.
Their SMSF could then purchase the business premises, with the $500k sale proceeds used by Jim and Sue to pay out their private mortgage completely. (NB: Capital Gains Tax exempt due to the application of small business CGT concessions).
Annual rent of approx. $50k (10% yield) could be paid to the fund. This rent is tax deductible to the business, but is exempt from tax in the superannuation fund.
The balance of taxable income is now only $25K each. If they contribute $7K each of this into superannuation their personal income will be below the TFT and they will pay no tax whatsoever.
Therefore, after the restructure, tax paid on the entire $100K profit is effectively just $2K (15% contributions tax in the fund on $14K contributed)
– The TTR pension taken from superannuation to compensate for the contributions made into the fund is tax free to Jim.
– No CGT is payable when the commercial premises are ultimately sold.
**The above is a generic example for illustration of possible tax outcomes only, but should those tax outcomes should not be relied on without seeking specific tax advice to your circumstances. The example only considers tax and does not consider the many other relevant considerations of whether an SMSF is suitable. If you are considering an SMSF you should seek financial advice from a licensed financial advisor.
Please visit Hoffman Kelly Financial Services for further information.
Click here to read our Feature Article highlighting SMSF