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Making the best out of super tax concessions

Victoria Kuok  |  22 Aug 2017Text size  Decrease  Increase  |  
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In the current uncertain legislative and socioeconomic environment, it helps for SMSF trustees to plan with greater certainty when it comes to their taxes.


Tax on earnings for accumulation accounts are generally 15 per cent, while pension account earnings are tax-free.

In the post-transfer balance cap era, SMSF trustees must commute their excess pension back to accumulation if their total pension balance exceeded the $1.6 million transfer balance cap as at 30 June 2017.

But all is not lost, given there are several hidden gems in tax concessions. Some are long-standing, while others have recently been put in place.

If you buy shares for their franking credits, remember the "45-day rule". This rule requires you to hold your parcel of shares for more than 45 days for ordinary shares or 90 days for preference shares so that your SMSF will be entitled to franking credits in relation to that parcel.

Now you've hung on to your shares for a while, remember your next time-based hurdle, the CGT discount, which are for assets held for 12 months or more before the relevant CGT event.

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The CGT discount for an SMSF is 33.3 per cent of its 15 per cent concessional tax rate, effectively a 10 per cent tax rate.

If you own depreciating assets, there may be deductible expenses that can reduce your taxable income. These can be cash expenses such as maintenance and repairs, others can be non-cash such as depreciation.

Care must be taken if your asset is secured under a limited recourse borrowing arrangement (LRBA), because your asset must be on an as-is basis at the time when the arrangement is made.

Similarly, you cannot dissect your parcel of shares that is secured under an LRBA--it must either be as is or wound up/sold in its entirety.

If you make a substantial windfall that goes beyond $300,000 under the three-year bring forward rule for non-concessional contribution caps, remember this cap is by headcount.

In case you feel generous and share your windfall with family members, you can help them save by using their contribution caps.

For a four-member SMSF with no prior cap trigger history, and should their age limits allow it, you may contribute up to $1.2 million.

Also, non-concessional contributions can be in cash or in-specie. This means you may also contribute non-cash assets such as a commercial property or your portfolio of listed securities.

Whatever assets you contribute, refer to the arm's-length rule and make sure you meet the sole purpose test.

Your asset allocation must align with your investment strategy--be prepared to justify how contributing these assets will help you meet your investment objectives.

Whether you run your own business or work for someone else, you may now make personal pre-tax contributions under the new concessional contribution limit of $25,000.

Consider using up all family members' concessional contribution limits where cash flow allows, where individual marginal tax rates make sense, and while your age allows you to. For a four-member SMSF, you may contribute up to $100,000 a year.

The tax difference between generating income in an SMSF versus individually can be significant over time, especially if members have a high individual marginal tax rate. With compounding tax savings, they can be reinvested to accelerate wealth creation in the long term.

One last thing to bear in mind is that these tax concessions are made on the condition that your SMSF is a complying fund.

Simply put, your SMSF must stick to the rules to maintain its complying status, which avails you of a concessional tax rate. For a non-complying fund, the rate is the highest marginal tax rate of 45 per cent.

Speak to your SMSF accountant and financial adviser to make the best out of your hard-earned money.

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Victoria Kuok is an SMSF specialist advisor at the SMSF Association. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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