A seemingly counterintuitive strategy is for successful, cashed-up SME owners to take advantage of opportunities to really boost their super savings despite the risk of future changes to the tax treatment of superannuation.
Some of these super-boosting opportunities are unique to small business owners – including the potential ability to make much larger contributions than other fund members using the proceeds from the sale of eligible small business assets.
Strategies to maximise super may seem to fly in the face of the apparently increasing risk that a future government will target higher-balance members by taxing some of their super fund’s investment earnings or pension payments.
Under existing law, no tax applies to super fund earnings backing pension payments while superannuation pension payments are tax free for members over 60 – no matter the balances.
Meg Heffron, co-principal of Heffron SMSF Solutions, says while future legislation will “almost certainly” reduce the attractiveness of super in some way, it will almost certainly remain a concessionally-taxed way to save.
Heffron emphasises that anyone concerned about a possible future tax on fund earnings in the pension phase should keep in mind that some of super’s key tax concessions are upfront. (Compulsory, salary-sacrificed and personally-deductible contributions, for instance are subject to a 15% contributions tax instead of marginal rates.)
Although SME owners are among the biggest supporters of super through self-managed funds, the vast majority of self-employed small business owners have little or no super, according to research by the Association of Superannuation Funds of Australia (ASFA). Super contributions are not compulsory for the self-employed owners of non-incorporated businesses.
Super-boosting strategies for SME owners to consider include:
1. Contribute savings from small business tax cut to super.
The government plans to cut the corporate tax rate for eligible small businesses by 1.5% to 28.5% from 2015-16 while providing a 5% tax discount for unincorporated small businesses.
2. Contribute proceeds from sale of certain small business assets to super
Under certain tax concessions, eligible vendors of small businesses can rapidly boost their super savings while minimising or eliminating capital gains tax (CGT) from the sale.
Contributions of proceeds from the sale of small business assets that qualify for particular CGT concessions – the so-called 15-year ownership or the retirement exemptions – do not count towards the non-concessional (after-tax) contribution cap if within a lifetime limit. The indexed limit for 2014-15 is $1.355 million.
Heffron says that eligible sellers of small businesses should “absolutely” consider this way of boosting their super contributions if appropriate.
3. Take more advantage of the standard concessional and non-concessional contribution caps
Again, the logic is that any changes to super by a future government will almost certainly keep at least some of super’s tax consessions.
As Heffron says, concessional tax treatment is necessary to encourage voluntary super savings.
4. Save inside and outside super
One of the reasons to keep some super savings outside super is that a future government may progressively increase the age for access to super benefits.
“You always want to hedge your bets,” suggests Heffron, “and have a decent part of your retirement savings in a different structure [than super] or in your own name.”
Australia’s tax-free threshold of $18,200 (or $36,400 for a couple) means that a couple can build-up a relatively valuable investment portfolio outside super before the earnings become taxable.
As tax and superannuation writer Stuart Jones discusses in the Australian Financial Planning Handbook (published by Thomson Reuters) a couple over 65 entitled to the Senior and Pensioner Tax Offset (SAPTO) can “effectively have a maximum of $57,948 in 2014-15 of income outside super and pay no tax.” (Some Medicare may apply).
5. Don’t be frightened off super by media headlines
Do your sums about the effectiveness of super and seek quality professional advice.