Boost your super payout
Monday, 14 January 2008
Last Updated: Tuesday, 15 January 2008
In this section:
A million-dollar opportunity
By Michael Laurence
Many super fund members face crucial decisions over the next couple of months about whether to make after-tax contributions of up to $1 million before the arrival of the simplified super regime on July 1. Never before would Australian investors have felt under such time pressure to make decisions about how to invest such a large sum.
The Federal Government has prompted this sense of extreme urgency by allowing fund members to make these huge contributions between May 10 last year and June 30 this year – before restricting after-tax contributions to as low as an indexed $150,000 a year.
The big carrot for significantly building up super savings is that super lump sums and pensions become tax-free from July for those over 60. And, of course, super fund earnings are concessionally taxed during the saving phase.
Fund members should act with extreme care when deciding whether to make large after-tax contributions of up to $1 million over the next few months and they should gain high-quality professional advice.
Here are seven ways to raise the money to make large super after-tax contributions by the June 30 deadline.
1: Contribute a large inheritance
Potential opportunity: This would involve contributing an inheritance immediately into super rather than investing it outside the super system.
Points to watch: Alan Freshwater, co-principal of Bondi, NSW, financial planning group RetireInvest, says you should not overlook the need to adjust the asset allocation of your super portfolio when contributing a sizeable inheritance. (Ideally, your portfolio should be diversified to maximise returns within your personal tolerance to risk.)
Freshwater cautions against becoming caught up in the current sharemarket euphoria and putting all of a large inheritance into shares within your super fund at a time when many shares are considered fully priced. He also warns that you should be aware that an inheritance contributed to super will be locked away until you permanently retire after age 55.
2: Transfer shares into super
Potential opportunity: Listed shares are among the few assets that you are allowed to transfer from your own name into your self-managed super fund.
Points to watch: Particularly given the strong performance of the sharemarket since March 2003, the transfer may trigger a big capital gains tax (CGT) bill. Before undertaking this strategy, calculate when the CGT is likely to be recouped in the concessionally taxed super system.
Freshwater points out that fund members without employer support – including the self-employed and retired fund members under 65 – can claim tax deductions for personal contributions, which include shares transferred into a DIY fund. Depending upon the circumstances, these deductions may eliminate any CGT.
3: Sell investment property to contribute
Potential opportunity: Given the long-running residential property boom, which is still running in some states, the sale of investment real estate will typically raise large sums to contribute to super.
Freshwater points out, for example, that you may have owned an investment property for many years and already intend to sell it when nearing retirement. “Also, the yields on residential investment properties are relatively low,” he says.
Points to watch: The transaction costs – CGT and stamp duty – are likely to be high and you should calculate when these are likely to be recouped into the concessionally-taxed super system. The strategy of selling an investment property to make a super contribution will not be rewarding in every case; much depends on personal circumstances. Keep in mind that time is running out to put a property on to the market and conclude the transaction by June 30.
4: Borrow to contribute
Opportunity: This strategy is beginning to be widely promoted by some fund managers and should be treated with particular caution, although it can be appropriate in some circumstances.
Points to watch: Interest on a loan to finance a super contribution is not tax deductible, a crucial point if a particularly large amount is borrowed. And anyone with employer super support is not entitled to tax deductions for personal super contributions.
Another critical point to watch is that some fund managers are promoting the borrow-to-contribute strategy using unrealistically high returns from super in their assumptions. The big superannuation returns of recent years will not keep going forever.
Freshwater says borrowing to contribute may be an attractive strategy in the short term in certain circumstances, given the $1 million opportunity to contribute to super by June 30. For instance, you may be part of the way through selling a valuable asset, but the transaction will not be completed until after this deadline. “I am generally bearish about borrowing to contribute,” Freshwater says.
Meg Heffron, co-principal of NSW self-managed fund consultancy Heffron Consulting, says a fund member’s ability to service the loan and the possible risks to future cash flow should be considered before borrowing to contribute.
Heffron says circumstances in which borrowing to contribute may be appropriate include when there is an intention to repay the loan when the family home is downgraded in a few years or following the sale of a valuable asset over the next 12 months.
She emphasises in a very detailed study of the new super system that a fund member must be comfortable with the risks of borrowing. Again, so much depends on personal circumstances.
5: Downgrade your home to contribute
Potential opportunity: On the face of it, this seems an excellent way to raise a large sum to contribute, particularly if you want a smaller home for your retirement.
Freshwater says you may be nearing retirement and have long been planning to move to a smaller home in, say, your 60s. It may have been in the back of your mind before the new super regime was announced.
Points to watch: Expect transaction costs on the sale but no CGT because of a main residence’s CGT-exempt status.
6: Transfer business property into super
Opportunity: Business real estate is one of the few assets that fund members are permitted to transfer from their own names into their self-managed funds.
Points to watch: Carefully consider the effect that the ownership of a costly business property by your fund will have on its diversification. Also keep in mind that business property is relatively illiquid and can take a long time to sell if a super fund needs to pay a member’s retirement benefits.
Freshwater emphasises that the transfer of business property into your DIY fund will incur transaction costs, including CGT in many cases. “But generally, business property is a good asset to move into a self-managed fund,” he says.
7: Contribute proceeds from sale of small business
Potential opportunity: Vendors of small businesses have a special opportunity to make after-tax super contributions of up to $2 million.
Leo Hollestelle of Hollestelles Specialist Tax Advisers in Sydney explains that in addition to the standard after-tax contribution of up to $1 million allowable until June 30, vendors of small businesses are entitled to contribute up to an indexed lifetime limit of $1 million from certain proceeds from the sale of their enterprises. And crucially, this special $1 million small-business cap will apply before or after June 30 and is in addition to the standard annual limits on after-tax contributions in force from that date.
As Hollestelle explains, proceeds from the sale of a small business that can be contributed to super up to the $1 million lifetime limit are those that qualify for the small-business CGT exemptions. These are assets that attract the 15-year ownership exemption and gains that qualify for $500,000 retirement exemption.
Points to watch: Tight eligibility rules apply to CGT concessions for small business vendors. Meg Heffron adds: “While Government announcements have implied that small business owners will be able to place the proceeds arising from the sale of their businesses into superannuation without being penalised by the new [contribution] caps, this is clearly not true.” She says this only applies to those who had owned their businesses for 15 years.
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By Jason Baker, IBISWorld
The main driver of revenue growth in the superannuation funds industry in Australia is the growth in voluntary contributions.
IBISWorld expects voluntary contributions to continue to rise moderately in the next five years, although at a decreasing rate. Contributions are expected to increase from an estimated $83.4 billion in 2006-07 to $127 billion in 2011-12, representing an average real rate of growth of 8.8% a year.
Australia's superannuation assets are now more than $1 trillion, having risen by $155 billion in less than a year. Most of that money has been invested by funds management firms, of which there are now reckoned to be around 150 in Australia.
Superannuation rule changes proposed in the 2006 budget are expected to lead to an increase in voluntary contributions. Deductible contributions, both employer and personal, made to superannuation funds will be concessionally taxed in the superannuation fund at 15%, which is current practice.
However, there will be an annual limit of $50,000 of deductible contributions per individual. Over this limit, contributions will be taxed in the superannuation fund at the top marginal rate.
As a transitional measure for those aged 50 or over, the limit will be $100,000 for a period of five years until 2012-13, when it will drop to $50,000. There will also be a cap on undeducted contributions made to super of $150,000 per individual each year. This cap applies from budget night 2006, but it may be extended to $450,000 over a three-year period.
So, to illustrate these changes, an individual aged over 50 may contribute $100,000 a year, up until 2012-13, and only be taxed at the 15% rate. After this time the individual will only be able to contribute $50,000 per year without being taxed at the top marginal rate of 45%. This is an opportunity that people over 50 can take advantage of.
A growing awareness of the need for Australians to contribute to their retirement savings is also expected to raise the level of voluntary contributions.
A study performed by the Association of Superannuation Funds of Australia (ASFA) in 2004-05, which was compared to a similar one undertaken three years earlier, found that more than half of the population are aware that their current savings plan will not provide for the lifestyle they expect in retirement.
In 2001-02, a third of the population believed that their current savings would provide for their retirement expectations. This figure declined to 12.5% of the population in the 2004-05 study. Furthermore, the study found that 70% of people recognise that the 9% compulsory superannuation contribution is not enough, that more people expect they will receive the age pension, and a rising number of individuals are expecting to work in retirement.
Some delusion still remains as to how the financial gap can be bridged; working in retirement is being considered by 80%, and 60% planning to sell or downsize their homes.
The recent passing of the Superannuation Act 2003 is expected to improve contributions from a socio-economic group less likely to have contributed greatly before.
Investment income is subject to market fluctuations of individual investment vehicles, and with investment income's share of revenue expected to increase over the outlook as total funds under management grow, the increased reliance on investment income is expected to result in increasing volatility of industry revenue.
The new choice of fund legislation is believed to have given about 5.2 million employees the right to choose their superannuation fund. In comparison, before July 1, 2005, about one million self-employed and owner-managers, and another two million employees had a choice of funds.
ASFA estimates that about 8% of fund members who are able to change will want to exercise their choice of funds right, leading to an estimated gross flows between fund sectors of about 6% of fund members.
In 2005-06 total assets for the industry grew by 18.9%. With the change in attitude as Australians continue to pull their heads out of the sand on superannuation, the industry looks set to continue growing at a very healthy rate.
Superannuation fund revenue growth chart
Source: IBISWorld
IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au
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By Michael Laurence
Many SME owners are shaking up their remuneration packages to take a much higher component in superannuation while significantly cutting back on cash salaries and dropping benefits that are either no longer needed or not tax-effective. The super remuneration package has emerged.
Meg Heffron, co-principal of DIY super fund consultancy Heffron Consulting, says many of her SME clients — who unlike regular employees have complete control over how their remuneration is received — are now really bumping up the superannuation in their packages. Heffron is advising numerous SME owners to take 100% of their remuneration in salary-sacrificed super, with no cash salary.
Heffron’s clients with all-super remuneration packages often meet their immediate income needs with the increasing popular transition-to-retirement super pensions. (The pensions — restricted by law to super members over 55 — are payable before retirement, as their name implies. Their concessional tax treatment makes the pensions much more tax-effective than fully-taxable salary income.)
New proposals a boon for business owners
Heffron says the main motivation for maximising super contributions, however, is the Federal Government’s proposals for tax-free super retirement pensions and lump sums from July this year for those over 60, replacing the reasonable benefit limits, which place dollar ceilings on concessionally-taxed super payouts on retirement. “It’s like the shackles on super have been lifted,” Heffron says.
Matthew Honan, managing director of the salary packaging group Remunerator Australia, also has found that many of his clients are redoing their remuneration packages to devote much more to super. Again, this is because of the Government’s plans for tax-free super benefits on retirement.
Gary Fitton, managing director of the Remu