What do I do about this small cap you’ve given me Swan?

Before moving on from last week’s adventures, let’s have a look at the system as it stands at the moment. I understand that the (relatively new) government has come under a little pressure lately to get the scissors out and cut down the spending part and increase the revenue (tax) parts of the budget, but in their near sightedness Wayne Swan and co have certainly hit the wrong button.

By severely cutting the amounts that can be contributed and be claimed as a tax deduction (by 50%) and aiming at more future cuts to the amount the ‘wealthy’ will be able to claim, is sending the wrong message. They will simply find other means to cut their bills that are far less productive to the national savings pool. It may even find its way to more offshore tax schemes, if it is going in super at least Swan (and his merry band from the ATO) will get the 15% contributions tax on its earnings.

Wake up Swanny!

The new simple super scheme is riddled with complications and compliance nightmares. The old scheme was just as confusing but with the help of a ‘smart’ licensed adviser/financial planner at least you could manage your excess contributions.

Manage my cap please

Firstly, be very careful of the timing of any contribution to super. You might have done an online transfer on June 30, but the receiving end of where you put it may record it ‘in the next financial year’. That transfer of shares you ‘organised’ in May but forgot to send to the fund. It will be recorded when it is received, not when you planned to send it. If the value of those shares you planned to transfer go up in value that might put you over your very small cap maximums. (To recall what they are please refer to “This cap is too small for my retirement can I have another” part 1) Also, be mindful that if you are salary sacrificing your income to reduce tax these amounts now count for your cap maximums.

If you are planning on selling the business, or part thereof, time your contributions and stagger your payments. For example, if you’re over 50 and you sold it say in April 2009 (08/09 financial year) with the proceeds received in June and if you place your maximum contribution in ($500,000)* that month, the bring forward provision is invoked. You’d only need to wait for two financial years to tick over to July 2011 (11/12 financial year) then you can use the bring forward provisions again and place in another $475,000*^.

Why would I use a superannuation strategy you ask? Well, your earnings are taxed at a maximum of 15% instead of the maximum of 46.5% outside of super (depending on your income of course) and if you are over 60 and turn this into an income for yourself the funds earnings and payments are tax free.

Whoops, my bad

Don’t forget also you have limits on the timing of when you can claim a deduction for any contribution. What if you unintentionally make a mistake? Here’s some good news you can seek to rectify the excess contribution but it must be in a special circumstance and there must be evidence of some consistency for Swan and the ATO to cut you any slack. I’ll kick off with a timely example.

Megatron is 63 and sells her business in late 2009. From the proceeds she decides to kick in $300,000 into one super fund and $450,000 (750k) into another for which no tax deduction is claimed. She receives an excess contribution assessment notice from Swan and his likeable pals from the Australian Taxation Office.

Megatron applies for Swan and the ATO to exercise their discretion by arguing the contributions should have been counted to the earlier years when she did not make any contributions and argued that the ‘bring forward’ provisions did not apply. In this case it is reasonably foreseeable that Megatron would exceed the contribution cap when she made the contribution and the penalty will stand. The entitlement to the cap is a use it or lose it basis, you can’t carry it forward. If you have obtained the professional advice of a financial adviser it will fall on them to get it right, unless you deliberately withhold information relevant to your contribution circumstances.

There are separate conditions where Megatron may apply at the time of her contribution for CGT small business (Capital Gains Tax) concessions. If she qualifies it can all go in but that comes under a separate topic altogether of CGT small business concessions which I will go over another time.

Directors info please!

If you are a company director or operate through a discretionary trust structure then some of the circumstances may change. The ATO requires that you be a common law employee under the Superannuation Guarantee (Administration) Act 1992 (SGAA) that is you must be authorised under the company’s constitution to receive directors fees a salary or wages, meaning you cannot generally be a director who refuses to take a wage or directors fee and attempt to claim a tax deduction for your contributions. (Even if you satisfy an employment activity condition). If you are entitled to remuneration then you must also meet the 90/10 rule**.

Another way around this is if you are selling up, take a small wage or directors fee from the company. Then maybe declare a dividend big enough so as the income from any remuneration falls below 10% (don’t forget any salary sacrifice arrangement is now included back as income). Again, nice work Swanny! Another fantastic recent addition to your bag of tricks.

*This assumes that you meet the 90/10 rule for substantially self-employed persons to be eligible to claim a tax deduction for the $50,000.

** The 90/10 rule assumes that no more than 10% of your income is employer supported i.e. the salary or wages you pay your employees with the 9% paid into super.

^This assumes an entitlement to a tax deduction of $25,000 in future years which may also be a higher amount from indexation.

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.