Super strategies to maximise savings

Flexibility and control are the key attractions of self-managed superannuation, but there is no point going to the trouble of running your own fund if you don’t make the most of it.

Flexibility and control are the key attractions of self-managed superannuation, but there is no point going to the trouble of running your own fund if you don’t make the most of it.

SMSFs can use a variety of tax-effective strategies to maximise their retirement savings. Some of these strategies, such as limited recourse borrowing, are only available to SMSFs; others are available to all super funds but not all funds offer them.

Here are three popular strategies to consider.

Borrowing to invest

Borrowing to invest is a proven way to boost long-term savings. The caveat is that debt must be used prudently, especially when your retirement nest egg is at stake. That’s why there are strict rules for borrowing arrangements inside super.

Limited recourse borrowing arrangements (LBRAs), as the name suggests, limit the lender to taking possession of the investment asset securing the loan. Say a bank lends your SMSF $400,000 for a property purchased for $500,000. If the property is later sold for $350,000 the bank loses $50,000 and cannot come after you or your fund to cover its losses.

SMSFs can use a limited recourse loan to gear into any asset a fund is normally allowed to invest in, from cash and collectibles to bonds, shares and property.

In reality, gearing makes most sense for growth assets such as shares and property, provided you understand the risks as well as the rewards and have a long enough time horizon to produce the returns necessary to make it profitable.

Limited recourse loans can only be used to purchase a single asset. The asset must then be held in a ‘bare trust’ that holds the asset on behalf of the super fund.

This can cause problems for direct share investors because each stock is treated as a single asset requiring its own trust. If you want to borrow to invest in a diversified portfolio of, say, 10 stocks then the exercise of setting up 10 trusts will be costly.

You can get around this by investing in a single exchange-traded fund (ETF) or listed investment company (LIC). These provide diversified equity exposure but you still need to make a large enough investment to justify the set-up costs. This is why property is the more popular choice for a SMSF gearing strategy because of the relatively large size of each property transaction.

SMSF property investment has really taken off since the government relaxed the rules relating to SMSF borrowing in 2007. So much so, that the next chapter in this series will be devoted to the subject.

Super splitting

Couples with lop-sided super balances potentially have a lot to gain by super contributions splitting, especially if the government’s proposal to tax pension income above $100,000 becomes law. In that event, someone with a high super balance could redirect their contributions to a spouse with a lower balance and avoid paying tax on their pension income.

Super splitting works like this. Say you have a super balance of $2 million and your partner has $100,000:

  • You could make a non-concessional (after tax) contribution into your partner’s account of up to $150,000 a year or $450,000 in any three-year period.
  • You could split up to $25,000 of concessional (pre-tax) contributions made in the previous financial year into your partner’s account. This must be done before the end of the following year. For example, concessional contributions made in the year to June 30, 2012 must be split by June 30, 2013.

Some people aged over 50 may have made concessional contributions of up to $50,000 in the 2012 financial year which can be split before June 30, 2012. The concessional contributions cap is due to increase to $35,000 from July 1, 2014.

If your partner is receiving super guarantee payments or making voluntary contributions you need to take this into account and not exceed their contribution limits. It should also be noted that any contributions you split with your partner still count towards your own contributions caps.

Excess contributions are heavily taxed so slip-ups could cancel out the tax advantages of super splitting if you are not careful.

Small business concessions

Small business owners tend to spend their profits building up their business, with little left over to contribute to super. In acknowledgement of this, there are a number of tax concessions available to eligible small business owners to help boost their super when they sell up and retire.

  • Small business 15-year exemption. If the business was owned for at least 15 years and the owner is over 55 and retiring the business can be sold free of capital gains tax and injected into super. There is a lifetime CGT cap of $1.255 million but this is on top of the existing non-concessional contribution caps.  This means you could sell up and, provided you are under 65, contribute up to $1,705,000 to your super fund ($1.225m plus $450,000 non-concessional contribution).
  • Small business retirement exemption. If the business has been owned for less than 15 years you can still sell free of capital gains tax. You don’t need to be retiring but if you are under 55 you must contribute an amount equal to the capital gain into super, up to lifetime maximum $500,000. Any such contributions will reduce your lifetime CGT $1.225 million cap mentioned above. If you are over 55 you don’t have to make a super contribution, but if you do it can be counted under the CGT cap.

To qualify for these concessions, the business owner must have annual turnover of less than $2 million or net assets of less than $6 million, excluding the family home and super.

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