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Self Managed Super Fund (SMSF) Article
Max the tax cuts on your super contributions

By Tony Negline.

This article may be out of date.

4th June 2008

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The end of the financial year is fast approaching and many people are thinking about the tax deductibility of personal super contributions.

This deduction can also be a very important tactic for many investors approaching retirement.

Their aim will probably be two fold.  Firstly, they may want to invest as much money into super as possible (this makes eminent sense because after ago 60 superannuation is very tax effective).  Secondly, they may want to do every aspect of these transactions tax effectively.

Before we look at the tax deductibility part of this issue we need to work out if personal super contributions can be made.  Contributions to super are allowed for anyone under age 65.  For super investors aged at least 65 but under 75, a work test has to be met and these contributions must be made before 28 days after the end of the month in which the investor turns 75.  Personal contributions from age 75 onwards are not permitted.

Often an investor approaching retirement will be selling assets in order to make these personal super contributions.  Other than the family home most assets will incur capital gains tax when they are sold.

Sometimes an investor will want to transfer an asset into their super fund via a process called an in-specie contribution.  Under this process the ownership of the asset changes from being in the investor's name to being in the super fund's name.  The super fund deems the value of the asset to be a contribution.

CGT is paid even when a person uses this in-specie contribution process because the owner of the asset is deemed to have changed.  This will be the case if an investor contributes an asset to a super fund and they are the only member of that fund.

When doing this transaction it's very important to make sure that appropriate paper-work is completed.

Super fund members thinking about this type of transaction need to be aware that there are restrictions on the type of assets super funds can acquire from members, their relatives and entities these people control or the law deems that they control.  The main asset categories that are allowed are listed shares and real property used solely for running one or more businesses.

SMSF trustees should check their trust deed to make sure their fund can accept non-monetary assets as contributions.

What value is given to the deemed contribution?  The market-value of the asset on the date the asset is transferred.  How is this worked out for assets whose value changes constantly, for example listed shares?  The ATO has said, that ideally the buy price at the close of trading should be used to both work out the amount of CGT owing and the value of the contribution.  A good justification would be required to use a different price and that it should be used throughout the transaction.

Once the asset is transferred into super the capital gain is included in the taxpayer's assessable income for tax purposes.  From here that income can be offset by claiming tax deductions.  This is where the personal super contribution tax deduction comes into play.

In the old days personal super contribution tax deductions were only available to people who were self-employed.  This limitation was removed over 10 years ago.

From July 2007 onwards, a tax deduction for personal super contributions will be available when, during a financial year, less than 10% of the investor's total assessable income for income tax purposes and reportable fringe benefits were received from employers who would have to make compulsory Super Guarantee contributions for the investor.

If you are not employed then you will automatically satisfy this rule.  This means that this tax deduction is available to semi-retirees not in formal employment arrangements.

It is possible to be an employee for Super Guarantee purposes but the employer does not have to make super contributions.  Two examples are typical here.  Firstly employers do not have to make SG contributions for any employees who earn less than $450 in a month.  Secondly employees aged 70 or over also do not receive SG contributions.

Additionally just because an employer has not made SG contributions for you does not mean you can claim your personal contributions as a tax deduction.

Once a person has got through all these rules they are free to claim as much of their personal super contribution as they wish.  The first $50,000 of contributions claimed is taxed at 15% in the fund.  Amounts above this are taxed at 46.5%.  For those over 50, the $50,000 threshold is increased to $100,000 between July 2007 and June 2012.  If a taxpayer turns 50 during this period the revised threshold applies in every financial year until June 2012.

Taxpayers claiming this tax deduction cannot create or add to a tax loss.

Lets look at an example.  Jim Jones, an under 65 retiree, owns 2,000 BHP shares.  He bought them two years ago for $15 a share.  They are now trading at $46 each.  If he contributed them into super he would be able to claim a personal super tax deduction but this would mean his taxable capital gain would be about $31,000.  This makes his total income $90,000 for tax purposes.  On this gain he would owe $10,900 tax in 2008.  By claiming a deduction he reduces the tax payable to $4,650.

Personal Super Tax Deductions

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