- Budget measures impose 15% 'surcharge' on those with income over $300,000 in a particular year
- An existing strategy may help you beat the surcharge
- Depending on your circumstances, the strategy may deliver ongoing benefits
The Federal Budget contained two key measures aimed at the wallets of super investors:
- A two-year deferral of the $50,000 concessional contribution cap for those with balances of less than $500,000.
- A ‘super surcharge’ (not that we are calling it that) of 15% on contributions of those earning over $300,000.
Not much can be done about the first measure but in the second there’s a glimmer of hope.
Through the use of an SMSF’s reserve account, investors can bring forward contributions, enabling you to use next year’s $25,000 concessional cap this year.
Normally, this is only of significant benefit to those who are going to have a ‘change of circumstances’—a higher tax rate this year than next, for example. There’s little benefit to those staying on the same marginal tax rate from year to year.
However, the new ‘$300,000 rule’ provides an opportunity for those affected to benefit from the same strategy. By effectively ‘bringing forward’ your 2013 contribution you may be able to avoid the additional 15% hit which will apply from 1 July.
Remember, the Budget proposals don’t just hit those on salaries of over $300,000. Those with one-off capital gains, trust distributions or who have simply ‘had a good year’ may also be affected.
A few words of warning before we explain further:
- Until further details are released we won’t know for sure whether the strategy will work. It may end up being a situation where you have to take a chance, although without any great downside if it doesn’t work out.
- It will work better for some than others. The self-employed and passive income recipients for example, are better candidates than PAYG employees (mind you, when is that not the case?)
- Technically, it works for all super funds. Practically, this is a strategy for SMSFs. Too much can go wrong when relying on an external party.
And of course if you are not an expert yourself, make sure you seek help from a professional tax adviser. With a potential value of $4,000 (and the possibility of using the strategy in the future), it’s a worthwhile expense.
The key elements of the strategy are as follows:
- ‘Normal’ concessional contributions (up to $25,000) are contributed and credited to the member’s account in advance of 30 June.
- ‘Additional’ concessional contributions (up to a further $25,000, but note our comments below) are made just prior to 30 June but held by the SMSF in a contribution reserve (an account where contributions are held prior to being allocated to a member’s account).
- Super funds have 28 days to credit contributions to a members account. So the ‘additional’ contribution might be credited on, say, 15 July.
- The $25,000 per annum cap is based on the time of crediting to the members account. So the relevant date is 15 July and the ‘additional’ contribution prior to 30 June falls in the subsequent year’s cap.
- But the deduction (either to employer or employee) still arises in the prior year, as does the 15% tax paid by the super fund.
Since the Budget proposal relies on increasing the 15% tax paid by the super fund (to 30%), it’s logical to conclude that the ‘$300,000 test’ needs to apply in the same year.
In the case above, this would be the prior year. In other words, for the year ended 30 June 2012, before the new rules come into effect.
The benefit will depend on your personal circumstances.
Someone not subject to Super Guarantee Contributions (SGC) (the self employed, for instance) may be able to bring forward the entire $25,000 cap. With a 15% potential ‘surcharge’, plus another 1% for the impact of this year’s Flood Levy, the benefit is $4,000.
If you are subject to SGC then you will need to use some of your $25,000 cap in the following year. SGC is only required to be paid on a maximum of roughly $180,000 of income (so you will be ‘forced’ to make about $16,000 concessional contributions in the subsequent year and can only bring forward the remaining $9,000 of cap). This reduces your benefit to about $1,500.
Remember that, if you have the flexibility to shift income from one year to the other (so you only hit the $300,000 cap in alternate years), you may be able to keep on using this strategy. More on this in later articles.
Like any strategy suggestion, there are a few pitfalls to avoid. For instance:
- This legislation is a work in progress. We will continue to monitor the situation and report any updates. But if the strategy is of interest, you should start looking at your situation now. It’s not something that can be done overnight.
- The big pitfall is stuffing up the numbers or mechanics and ending up with excess contributions tax. Take particular note of our comments on the SGC and be aware that your employer may do their own thing – for instance contribute beyond the $180,000 cap (note also the exact cap for 2012/13 hasn’t yet been provided).
- The ATO may take exception to the strategy. This risk is reduced somewhat by the fact it has offered its views on the technical issues (refer ATO Interpretative Decision 2012/16). This though is a slightly different context.
- Note also that the ‘$300,000 test’ will be based on ‘adjusted taxable income’. This means a number of other amounts—concessional contributions, fringe benefits, negative gearing losses, foreign income and tax-free government pensions and benefits—are added to your taxable income to see if you have failed the test. Child support payments are subtracted from it. Make sure you are including the right amounts to work out whether the ‘$300,000 test’ applies to you.
Finally, we can’t stress enough how important it is to get personal tax advice to make sure you’re aware of all the risks and that all your personal circumstances have been considered.
In a nutshell
The Treasurer’s boot has been aimed at your super fund wallet. This strategy may give you an opportunity to keep yours out of harm’s way, but watch out for future updates.