Small business owners can employ a number of different approaches to make the most of their super contributions before end-of-financial-year.
SME owners with their own self-managed super fund are typically well-placed to maximise their end-of-financial-year and new-year super strategies.
Their dual role as business owners and SMSF trustees potentially gives them more flexibility over the timing and amount of contributions while ensuring that their super fund deals with contributions in the way they want.
Particular year-end and new-year SMSF strategies for small business owners include:
Here are our 15 best end-of-financial year and new-year SMSF strategies – if appropriate for your circumstances.
1. Maximise super contributions
Super members face the challenge of trying to maximise contributions into the concessionally-taxed super system while not falling into the potentially costly trap of overshooting their contribution caps.
“If you are in a position to contribute to contribution caps and you don’t, you have lost a tax-planning opportunity,” warns Paul Banister, tax partner for accountant Grant Thornton in Brisbane.
“If you don’t use it, you lose it.” This is because any unused portions of the annual caps do not rollover to the next financial year.
For 2014-15, the concessional (before-tax) contributions cap is $30,000 for members under 49 at the beginning of the financial year or $35,000 for members aged 49 or older. The standard cap on non-concessional (after-tax) contributions is $180,000 (or $540,000 if averaged over three years by eligible members).
Concessional contributions comprise salary-sacrificed and compulsory employer contributions as well as personally deductible contributions by the eligible self-employed and eligible investors.
2. Don’t leave contributions to last minute
This can be a trap for SME owners aiming to leave their money in their businesses for as long as possible before making contributions.
If a contribution does not reach your super fund by June 30, it will count towards next year’s contribution cap – and could lead to excess contributions in 2015-16 and an unexpected tax bill.
Stuart Jones, senior tax and superannuation writer for Thomson Reuters, says the tax office considers a contribution by electronic transfer is not made until the amount is actually credited to a super fund’s bank account.
3. Claim deductions for personal contributions by self-employed
The self-employed are entitled to a tax deduction for concessional contributions if less than 10% of their taxable income, salary-sacrificed super and “reportable fringe benefits” arise from work as an employee. (The concessional contributions cap applies to personally-deductible contributions.)
4. Contribute proceeds from sale of certain small business assets
Contributions of proceeds from the sale of small business assets that qualify for particular small business capital gains tax (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.
This strategy may provide a means for eligible vendors of small businesses to rapidly boost their super savings while minimising or eliminating CGT from the sale.
5. Split super contributions with lower-balance spouse
Fund members can ask their super funds to transfer or split up to 85% of their concessional (before-tax) contributions into their spouse’s super account. Significantly, SMSFs are generally well-placed to implement super-splitting strategies this late in the financial year because of their inherent flexibility.
Stuart Jones of Thomson Reuters comments in the Australian Superannuation Handbook that contribution splitting may assist fund members to “equalise their total superannuation balances to guard against a future government possibly seeking to introduce a cap on tax-free fund earnings for pension assets”.
No tax currently applies to super fund earnings backing pension payments (including a transition-to-retirement pension) while superannuation pension payments are tax free for members aged over 60.
6. Ensure eligible lower-income family members take advantage of co-contributions
This is a superannuation giveaway. From an SME perspective, a spouse working part-time in the family business, for instance, may be eligible take advantage of a government co-contribution.
Fund members earning less than $49,488 in 2014-15 and making non-concessional (after-tax) super contributions of at least $1000 may be eligible for a government co-contribution of up to $500, according to Graeme Colley, technical director of the SMSF Association.
7. Offset CGT with contributions
If you have sold an investment for a capital profit this financial year, you may have an extra incentive to maximise your concessional (before-tax) contributions before July 1.
Keep in mind eligible super fund members – including the self-employed and non-employee investors – can claim deductions for their concessional contributions. In turn, the deductions may offset the CGT on the capital gain.
8. Value SMSF assets as at June 30
SMSF trustees are required to value fund assets at market value as at June 30, reminds Colley. Trustees can no longer use historic valuations.
9. Make sure pension-paying SMSF pays minimum annual pension
Funds that fail to pay the minimum pension risk losing the tax-free treatment of fund assets backing super pension payments. The minimum pension payable, depending upon a pension member’s age, ranges from 4 -14% of assets in your pension account.
This is a particular trap given the rapid ageing of Australia’s population. Rice Warner Actuaries estimates SMSFs hold more than half of the total superannuation dollars invested in superannuation retirement products.
10. Get ready to contribute savings from small business tax cut to super in 2015-16
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 of up to $1000 for unincorporated small businesses.
11. Arrange now for salary-sacrifice contributions for next 12 months
Super matters to think about for the 2015-16 financial year include whether to make higher salary-sacrificed contributions in the 12 months ahead. Under tax law, arrangements to salary-sacrifice super must be in place before the income is earned.
12. Work out ways now to maximise next financial year’s contributions
This is a matter of checking your financial priorities and deciding if you have the means to make extra concessional (before-tax) and non-concessional (after-tax) contributions in the 12 months ahead.
13. Check eligibility now for transition-to-retirement pension for 2015-16
Another forward-thinking super matter is whether a fund member will become eligible for a transition-to-retirement pension in 2015-16. Super fund assets backing the payment of a super pension are no longer subject to tax. Fund members from age 55 are currently eligible for a transition-to-retirement pension even if still working.
14. Set longer-term plans to make super balances between spouses as even as possible
Making balances as even as possible between spouses may provide a defence against the possibility that a future government will introduce a cap on the currently tax-free treatment of fund assets backing super pensions. Generally, this needs to be a longer-term strategy to be really effective.
Apart from spouse contribution splitting (discussed in strategy five), Peter Crump, superannuation strategist for ipac South Australia, says strategies to help even balances include maximising contributions for lower-balance spouses and, if eligible, practising a withdraw-and-recontribute strategy.
As the name implies, the withdraw-and-recontribute approach is a two-step strategy. First, super is withdrawn as a pension or lump sum from the super account of the spouse with the bigger balance – if the spouse has legal access to his or her super. Second, the money is contributed as a non-concessional (after-tax) contribution into the super account of the lower-balance spouse.
Melbourne financial planner MatthewScholten, a principal Godfrey Pembroke, describes this withdrawal-and-contribute approach to help even the super balances between spouses as a common and legitimate strategy. It may also have estate-planning benefits.
15. Review SMSF strategies for 2015-16 and beyond
Things to think about include: the appropriateness of fund investment strategies, whether to make more use of the asset-protection attributes of super, the insurance needs of members, and effective estate planning.
Many SME owners hold theirbusiness premises held in their SMSF, partly because super fund assets are generally out of the reach of creditors if individual fund members are declared bankrupt, subject to claw-back provisions in the Bankruptcy Act.
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