The June 30 deadline for making a one-off $1 million contribution to super is fast approaching. By MIKE PRESTON
Superannuation was for a long time the least fashionable investment option going around, a stodgy but safe second-best to shares or property.
But all that has changed. Business owners are rushing to pour money and assets into superannuation, prompted by new rules that make super more attractive, but limit opportunities to make contributions, accountants and industry observers say.
For many business people, now is the time to be getting into super. We explore the strategies SME owners are adopting to make the most of the changes.
Why the hurry?
The Government has dramatically increased the attractiveness of super as an investment vehicle by making withdrawals tax-free for over-60s after July 1.
But the new regime has caps on the amount that can be contributed to super: $50,000 a year for pre-tax contributions (although over-50s will be able to contribute $100,000 a year until 2011) and $150,000 a year for post-tax contributions.
For many people, this will mean the maximum pre-tax contributions they can make will be halved, while post-tax contributions, previously unlimited, will be capped for the first time. This is a key change, dramatically limiting the opportunity that currently exists for quickly putting large sums into super.
Crucially, however, in the transitional period before these new caps kick in on July 1, it will be possible (as soon as the legislation is passed) to make a one-off $1 million post-tax contribution into super. This must be done before June 30.
The changes have turned the super world upside-down, says Jolanda Brezovec, financial services principal at William Buck.
“Previously it was very easy to get money into super, but it was a less attractive option. Now the situation is reversed: it is very difficult to get money in, but much more desirable to do so.”
How are SME owners getting money into super?
Business owners are putting money into super, and fast. Here are some of the main strategies for getting super plans in place.
1. Making multiple pre tax contributions
Some business owners are choosing to make multiple pre-tax super contributions before July 1, Brezovec says.
Under the current system, it is possible to have a full pre-tax contribution made to your super by each unrelated employer as well as a single personal contribution.
For business owners who work for more than one entity this can be a highly attractive option, especially given that the contribution will be often be tax-deductible for the employing entity.
2. Taking dividends from your business or selling to make a post-tax contribution
The time may have passed for using your small business as your retirement fund, according to Suncorp technical research adviser Gemma Dale.
She says an alignment of the super changes and capital gains concessions on the sale of certain small-business assets means it now makes sense to have as much wealth in super as possible.
A separate $1 million lifetime cap on capital gains tax-free super contributions from the sale of most small business assets effectively doubles the amount that can go into super.
“We’ve had a lot of people selling their businesses; I can think of two or three in the past couple of weeks who are working through the capital gains concessions and getting money into super. People are crystallising whatever assets they have to get in to super.”
3. Work part time and draw a pension – even if retirement is a way away.
When the new rules come into effect, it will be possible for over-60s to draw a tax-free pension from their super fund.
The new provisions will also allow a business owner to work part-time in their business, draw a part-pension from their super that is exempt from income tax assessment, and continue to make contributions to their super fund as an employee, says Graham Lester, a partner with accountancy firm Davis & Benson.
“We are seeing a lot of people restructuring their business to take advantage of these new pension rules, especially those looking to take a step back, but who want to continue to build up their super,” he says.
4. Putting business property into super
The removal of the 15% benefit tax has created a new incentive for business owners to switch their business premises into super, says Sunshine Estivo, an adviser with Ark Financial.
She says it is often worth selling business real property (land and buildings) into super and then leasing it back, even if extra money has to be pumped in to the super fund so it can buy the property.
“After 60, income derived from the property will often be able to be withdrawn tax-free and the property sold free of capital gains tax,” Estivo says.
There is one important limitation on this strategy, however: property that has a mortgage or other charge against it cannot be put into super.
The super benefits don’t end at June 30
Although the opportunity to put $1 million straight into super will be gone after June 30, people over 65 can make two years worth of post-tax contributions in advance, allowing a $450,000 contribution.
A variety of capital gains concessions are also ongoing, many of interact favourably with the superannuation system.
For business owners with retirement on the horizon, now is the time to start thinking now about how to structure your affairs to make best use of the tax advantages the super system now offers. With careful planning, you won’t be left behind.
To read about setting up a DIY super fund, click here.
For a story on the advantages of putting business property into your super fund, click here.
And to get up to date on the spouse tax benefits super can offer, click here.