Don’t be rattled by $1-million super deadline

Haven’t got the ready cash to make that 30 June super deadline? Don’t lose sleep over it. Smart entrepreneurs know that it is the beginning of an opportunity, not the end of one. By MICHAEL LAURENCE.

By Michael Laurence

The fast-looming deadline of June 30 to make after-tax super contributions of up to $1 million is not likely to unsettle many small-business owners.

However, smart entrepreneurs should now instigate strategies to maximise their highly tax-effective super contributions over the long haul.

In reality, most owners of growing small businesses have most of their capital tied up in their enterprises and cannot produce a quick $1 million, or anything like it, to contribute to super.

And this reality is despite the urging of professional advisers for SME owners to separate their personal and business assets wherever possible for wealth-creation and asset-protection reasons.

Martin Heffron, co-principal of self-managed super fund administrator and adviser Heffron Consulting in NSW, says few of his small-business clients are trying to meet the June 30 deadline to make extra-large, after-tax contributions.

However, Heffron says a minority of small-business owners among his clients are transferring their personally owned business premises into their DIY funds as undeducted contributions in time to make the $1 million deadline. (From July 1, after-tax contributions will be limited to an indexed $150,000 a year.)

Business real estate, as previously discussed in detail by SmartCompany, is one of the few assets that self-managed funds are permitted to acquire from their members. Listed shares also fall into this category.

“The largest group of our clients trying to take advantage of the $1 million limit comprises wealthy retirees who still have significant assets outside super, either in their own names, or in family trusts or companies,” Heffron says.

Heffron says his unincorporated small-business clients who are managing to make extra-large contributions intend to claim tax deductions up to their age-based limit deduction under super law. This will help to ease the impact of any capital gains tax that may be triggered by the transfer of business real estate into their DIY funds or the sale of investments to raise money for contributions.

Under the existing age-based limits – which are in force until the new simplified super system takes over in July – the deduction limit for members aged 35–49 is $42,585, and $105,113 for members over 50. Self-employed members are entitled to claim deductions, within the limits, for personal contributions.

And under the simplified super system, in effect from July, members over 50 can make “concessional” contributions of up to $100,000 until June 30, 2012 whereas members under 50 will be limited to indexed concessional contributions of $50,000 a year. “Concessional” contributions are the equivalent to “deductible” contributions under the existing super system.

Alan Dixon, managing director of financial planning and DIY fund consultancy Dixon Advisory in Canberra and Sydney, also reports that most of his small business clients do not have the ready cash to make huge super contributions before July 1, again because much of their money is tied up in their businesses.

Dixon says even if small business owners understandably don’t have the ready cash to make big super contributions at this time, they should be waking up to their new opportunities under the simplified super system. He urges SME owners to put strategies in place to maximise future regular contributions within their means.

Dixon believes that the Government’s setting of the deadline to make contributions of up to $1 million is having the positive effect of highlighting the opportunities in the new super regime to many members who can’t make huge contributions at this stage of their lives. The most attractive feature of the new super system is that members’ super benefits will become tax-free once they turn 60.

Here are three pointers as the new super system looms nearer:

Gain quality professional advice as soon as possible

This will give you an opportunity to see if there is anything to be done with your super arrangements before June 30, and to put a strategy in place to maximise your future contributions.

Financial planners expect that the salary-sacrificing of contributions to become much more popular. And increasing numbers of older members are expected to take advantage of transition-to-retirement pensions while simultaneously maximising their salary-sacrificed contributions.

(Transition-to-retirement pensions allow members over 55 who are still in the workforce to begin drawing down on their super savings to pay living costs. The pension income generally enjoys a 15% tax rebate until members reach 60, when it will become tax-free under the new super system. This is really a winning strategy with members combining the great tax benefits of salary-salary sacrifice with receiving a pension income that will be either tax-free or have very favourable tax treatment.)

Do not rush to make a large super contribution

The Australian Securities & Investments Commission (ASIC) is urging fund members to gain professional advice before making extra-big super contributions to meet the June 30 deadline for contributions of up to $1 million.

ASIC warns that strategies requiring particular care include selling an investment property or shares to raise money to contribute to super; transferring shares or business real estate into self-managed super funds; borrowing to contribute to super; or taking a reverse mortgage on your home to finance a big contribution.

For instance, selling or transferring assets into super could trigger a big capital gains tax bill. You should undertake financial modelling to determine whether the transaction is worthwhile.

Keep in mind that you can still make very large super contributions after June 30

You will be able to make after-tax contributions of an indexed $150,000 each year from July 1, and even bring forward three years’ worth of after-tax contributions to make a $450,000 contribution. This means couples could bring forward three years’ of contributions to make total after-tax contributions of $900,000.

On top of that, you will be able to make annual “concessional” (or tax-deductible contributions) of $50,000–100,000, depending on your age.

And small-business owners are not restricted by deadlines to make after-tax contributions of up to an indexed lifetime limit of $1 million from the proceeds of the sale of their enterprises that quality for small business CGT exemptions (see here for details).