Superannuation - More Attractive Than Ever
Part II
Superannuation is more than just putting away a little bit at a time during your working life to help fund your retirement. There are a number of additional areas of interest that can have a major impact on your quality of life in retirement, as well as affecting the level of tax you pay during your lifetime. Does either of the following apply to you? Follow the links for more information.
- Are you approaching retirement, running your own practice and wondering how best to deal with the sale so as to maximise dollars in your pocket?
- Do you have dependants to whom you would like to leave significant amounts of your superannuation in the unfortunate event of your death? Make sure they don't lose over 15% in death benefits tax.
Planning Opportunities
A number of planning opportunities were available to Self Managed Superannuation Fund (SMSF) members in the lead up to 30 June 2007, which would have enabled them to take greater advantage of the new rules commencing 1 July. Never fear though, there are still opportunities remaining, two of which are set out below.
Small Business Capital Gains Tax (CGT) Concessions
In a situation where a small business owner is looking to sell their business and retire, CGT concessions may provide an avenue to get a much larger sum into superannuation than is allowed under the new contribution rules. Further, the regulations governing small business CGT concessions have recently been expanded to allow more small business owners to access them.
Where a business owner satisfies the "Small Business CGT" requirements, they may be entitled to generous concessions designed to reduce, or even eliminate, the CGT generated by the sale of their business. By transferring some of the sale proceeds to their super fund under the "Retirement Exemption," they can take advantage of a fantastic opportunity to boost their superannuation prior to retirement, as well as save on personal CGT.
Scenario 1*
Dr. Smith is 61 years old and runs his private practice as a sole trader out of rooms on Sydney's North Shore. He has been offered $1.5 million for his practice by a large medical corporation. The practice's assets include goodwill, land and buildings.
Let's assume Dr. Smith qualifies for relief under the new rules as a "Small Business" for CGT purposes and is therefore entitled to access the Small Business CGT concessions.
Dr. Smith paid $500,000 for the practice 14 years ago, so the $1.5 million sale would be subject to CGT on a $1 million gain.
For CGT purposes, Dr. Smith may choose to apply the "Active Asset" concession, which allows him to reduce the capital gain by 50% for tax purposes, leaving $500,000 as a taxable capital gain.
He can then reduce that by a further 50%, utilising the "General Discount" available to individuals. This will leave $250,000.
Finally, Dr. Smith may elect to utilise the "Retirement Exemption," which allows him to transfer this $250,000 to his superannuation fund of choice (including an SMSF) and have this final CGT amount exempted from tax. This $250,000 payment to super will not count towards either the Concessional or the Non-Concessional contribution limits for Dr. Smith in that year. The Retirement Exemption under these concessions does however, have a lifetime limit of $500,000.
The overall result is as follows;
- he receives $1,250,000 in the hand, from the sale of the business - tax free!
- the other $250,000 goes into his selected superannuation fund, also tax free, to help kick start a tax effective retirement strategy.
- the scenario assumes the business premises were used solely for business purposes.
*For completeness, please read the above scenario in conjunction with the preceding paragraphs
Death Benefits
Lump sum payments made after the death of a member of a superannuation fund are exempt from tax if paid to a dependant of the deceased or the trustee of the estate, who ultimately applies the payment for the benefit of a dependant of the deceased. In this context, "dependant" includes the member's spouse or de-facto spouse, any child under 18 years and any other person who is financially dependent.
Payments to a non-dependant cannot be in the form of a pension (i.e. payments must be made as a lump sum) and are generally subject to tax. Any fund member who plans to leave their benefits to a non-dependant, such as a financially independent adult child, will need to talk to their accountant or advisor to ensure that the most tax effective structure is in place.
Scenario 2*
Mr. and Mrs. Johnson (aged 67 and 54 respectively) have their own SMSF with $750,000 each from various employer contributions over the years (total balance $1.5million.) They have three adult children who are all financially independent.
Mr. Johnson is determined to leave his superannuation to his children in equal proportions and has detailed instructions in his will to that effect. Mr. Johnson is involved in a car accident on his way to work one morning and does not survive.
Mrs. Johnson, as the executor of his will, is required under its terms, to pay out the balance of his superannuation benefits to their children in equal proportions. Under the new superannuation laws, these benefits are not permitted to be paid in the form of a pension, as the children are not "death benefits dependants" due to their independent status.
Consequently, the benefits are paid to the children in the form of a lump sum, with each adult child receiving $250,000 cash. Under superannuation law, the benefits are taxable to the children at the rate of 15%, which means they lose $37,500 each to the ATO - collectively, $112,500 in Death Benefits Tax.
Had Mr. Johnson sought even the most cursory taxation advice on how to deal with his estate, he could have left instructions for his super benefits to be paid to his surviving spouse (who is a "death benefit dependant".) Mrs Johnson would have received $750,000 completely tax-free, regardless of her age. She could then pass on the full amount to the children - again, tax-free - although under this arrangement she is not legally bound to do so.
*For completeness, please read the above scenario in conjunction with the preceding paragraphs
Disclaimer: All examples are fictional scenarios and should not be taken to apply to any specific individuals circumstances. You should contact your advisor to clarify your own personal position.
Matthew Hall
Senior Associate
Custom Accounting Pty Ltd
(Australian Financial Services License No 286854)
website: www.customaccounting.com.au
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