Seven strategies for making extra-large super contributions
Monday, March 19, 2007/
The Government has dangled a big carrot in front of super fund members to contribute a huge amount of money before June 30, writes MICHAEL LAURENCE, and there are smart ways to raise this money.
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.
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.
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.
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.
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.
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.
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.
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 warns.