Spouse tax benefits overlooked
Monday, February 5, 2007/
Couples who work together in their family companies have a unique opportunity to save for retirement, reports MICHAEL LAURENCE.By Michael Laurence
SME owners can arrange for their companies to pay their spouses extremely high salary-sacrificed super contributions — provided the spouses do at least some part-time work for the businesses. This much-overlooked strategy provides a means to quickly boost super savings while simultaneously gaining excellent business and personal tax benefits.
The tax law allows the size of the salary-sacrificed super contributions for the spouses to far exceed the value of their employment duties, says Sydney tax lawyer Robert Richards. “The tax commissioner has stated in a tax determination that he will not attempt to apply his anti-avoidance powers to such arrangements except where unusual circumstances exist,” Richards says.
Tax office says it’s legitimate
“The strategy of an employer making exceptionally large super contributions for the owner’s spouse is considered legitimate even though the spouse works only part-time. It doesn’t matter whether the business is one of Australia’s largest companies or an SME.”
Richards argues the strategy of employing a spouse part-time and making big super contributions for him or her has become much more attractive given the Federal Government’s proposals to make super much more tax-effective from July 2007.
Business overlooks benefits
The tax determination explaining the commissioner’s approach to the use of the strategy was issued last year and then, according to some tax and superannuation lawyers, largely overlooked by businesses.
The commissioner had issued the tax determination after losing a test case against the owner of a small computer consultancy company, Michael Ryan, whose wife Maria received large salary-sacrificed super contributions even though she only did part-time secretarial work for the business. (Robert Richards acted for Michael Ryan.)
In one financial year, for example, Maria Ryan received just $6000 in salary plus $50,000 in salary-sacrificed super contributions.
The tribunal found that the super contributions paid by Ryan’s company were within the age-based legal limit for annual deductible super contributions and rejected the claim by the tax commissioner that the contributions were part of a tax-avoidance arrangement. The commissioner had unsuccessfully argued that the size of the super contributions were excessive given Maria’s secretarial duties.
“Any business adopting this strategy has to ensure the contributions are within the age-based limits on deductible contributions,” Richards says.
Superannuation lawyer Dan Butler, a director of DBA Butler Lawyers in Melbourne, says the tax determination extends the acceptability of the strategy of making large super contributions for spouses employed on a part-time basis to small businesses classified in tax law as personal service businesses.
These businesses — where one person such as a doctor provides most of the services — have passed strict alienation-of-personal-services income tests in tax law. Small service businesses that do not pass these tests face limits on their tax deductions, including for salary-sacrificed super benefits for spouses.
The tax determination also recognises, of course, the decision in the Ryan test case.
Here are six points for taking advantage of this potentially outstanding super and tax strategy for SMEs:
1. Understand the business and personal tax benefits
The salary-sacrificed super contributions for the spouse are fully deductible to the employer. And the contributions are not subject to any personal tax or fringe benefits tax, and are contributed to the super fund on a pre-tax basis. The only tax payable is the standard superannuation contributions tax of 15%, paid upon entering the fund.
2. Realise that this strategy is becoming much more attractive
The Government’s proposals to make super much more tax-effective from July 2007 are likely to increase the strategy’s popularity. (Under the proposals, super retirement benefits will become tax-free for those over 60.) Richards says: “The prospect of tax-free super benefits on retirement means that all fund members should be trying to get as much money into super, as quickly as possible. The strategy of making big salary-sacrificed super contributions for spouses working part-time in an SME is an excellent way to help maximise contributions.”
3. Understand the limits on concessionally taxed deductible contributions
The salary-sacrificed contributions for a spouse of the owner — or any employee for that matter — must be within the annual limits in tax law for deductible contributions.
Until July 2007, the current age-based deduction limits apply: $15,260 (under 35 years), $42,385 (35-49), $105,113 (over 50). And from July 2007 under the Government’s proposals, a standard $50,000 (indexed) deductible cap will apply with a transitional $100,000 cap on deductible contributions for members over 50 until June 30, 2012. (Above the proposed new caps, the funds have to pay extra tax — although the contributions will still be deductible to the business.)
4. Ensure the spouse is a genuine employee
“There must be real evidence of employment duties by the spouse who is receiving salary-sacrificed super contributions,” says Dan Butler. “The spouse must not merely be recorded on the books as an employee.”
5. Consider how the strategy can be used to maximum advantage
Richards suggests that owners of private businesses of all sizes should think about arranging salary-sacrificed super for their spouses who are working part-time for them.
He gives the example of three principals of an SME whose spouses work part-time in the business. By making the maximum age-based deductible contributions, each spouse can have up to about $100,000 paid into her super in this way if aged over 50.
6. Consider spouse super-splitting to further the strategy’s advantages
Greg Ganz, a partner of Sydney commercial law firm Parry Carroll Partners, says some couples are in the position to further the benefits of this salary-sacrificing strategy by combining it with spouse super splitting. (Since January 2006, couples have been allowed to split their super contributions between themselves.)
Ganz gives the example of a business owner aged 60 whose wife aged, say, 50 works part-time for his business. Both spouses could receive salary-sacrificed contributions up to their age-based deductible limits of a little more than $100,000 each. The wife could then use the super-splitting provisions to direct her super fund to pay the benefits into her husband’s super account. Under the Government’s super proposals, the husband’s age means he would have access to his super (including any super-splitting benefits) on a tax-free basis upon retirement any time from July 2007.