This article appeared in the March 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
Self-Managed Super Funds should consider these four opportunities in 2012.
By Grant Abbott, SMSF Strategies
If you are investing in shares through a self-managed super fund (SMSF) you are one of the fortunate Australians who may be getting a tax refund for not paying any tax. More on that later.
With strategies like that it is no wonder SMSFs continue to take the lion's share of the superannuation market, with $430 billion currently spread across 470,000 funds. Australian Tax Office statistics just published show that SMSFs have outpaced the combined growth of retail and industry-based superannuation funds over the past five years.
Below are my top four SMSF strategies, ideas and must do's for SMSF trustees and members for 2012.
1. Must do: Join the Australian SMSF Members Association (sponsored membership offer)
The Australian SMSF Members Association (ASMA) is a new not-for-profit association that is fast becoming a real voice of SMSFs. With more than 2000 members, ASMA is building contacts with government, regulators and the media to ensure SMSF members' benefits are grown and protected.
In this era of budget deficits, governments will look more and more to self-funded retirees to boost revenues and it is crucial for SMSF members to have a powerful say as a collective. Apart from lobbying, ASMA is building a strong strategy and a website for education and surveys to enable it to profile the views of its members on any particular superannuation issue.
Visit the ASMA website for a bonus membership to December 31, 2012. Enter your details and "Grant" in the sponsor box. The bonus is worth $175 per fund.
2. Contribute ASX-listed shares into your SMSF each year
Superannuation will now create a great divide across Australia. There will be those over 60 who do not pay tax and do not have to lodge a return, and those who are still stuck in the arms of the Commissioner of Taxation.
The ability for each member of a superannuation fund to contribute up to $150,000 of non-concessional contributions each year up to age 65, and later if working, will see more and more members seeking to consolidate a large part of their assets into their SMSF where allowed.
The important thing for those with an SMSF is they don't have to sell their assets to make a large contribution. If their SMSF trust deed allows it, they can contribute assets directly into the fund instead of cash.
There are some limitations under section 66 of the SIS Act 1993 but any ASX-listed investments, including shares and property trusts, fixed-interest investments, managed funds and commercial/business property or leases, can be transferred directly into the fund at market value.
Consideration should also be given to transferring ASX-listed assets in a family trust, family company or other entity into an SMSF if possible. The major benefit is that an asset currently being taxed under the ordinary income tax rules would be concessionally taxed or untaxed in super if used to fund a pension.
The tax side of contributions
Some important tax issues should be considered when transferring assets into an SMSF as a contribution. These four possible issues need to be considered in relation to your SMSF strategy.
- What profits from a business entity or employment income can be salary sacrificed as deductible superannuation contributions into an SMSF before June 30, 2012?
- Can business assets be transferred into an SMSF to take advantage of the CGT small business concessions - such as an office, factory or farm?
- Can a personal tax deduction be claimed for contributions for the year ending June 30, 2012? (See Strategy 3 below.)
- Can any imputation credits be used to reduce any fund contribution taxes - not excess taxes, just the ordinary 15 per cent contributions tax on deductible employer and member contributions?
3. Personal deductible contributions into an SMSF
Where a person makes a personal contribution into a complying superannuation fund they can claim a tax deduction provided that during the income year when the contribution is made they are not an employee or, if an employee, 10 per cent or less of their assessable income comes from employment. This means the following types of members, under age 65 who are not employed, can claim a personal tax deduction: retirees, carers, beneficiaries of a trust estate, shareholders, investors.
Although all contributions made by non-employees are deductible, thereby helping to limit capital gains on any transfer of ASX-listed assets into the fund, beware the excess concessional and non-concessional contribution taxes. For the income year ending June 30, 2012, the limit for those over age 50 during this income year is $50,000 with anything in excess being treated as a concessional contribution and taxed at 31.5 per cent.
A word to the wise: Last year 87,000 taxpayers were hit with excess contributions taxes, so make sure you get good advice before making any contributions and check all your contributions, no matter what the source.
4. Tax-effective investing in an SMSF
The most effective way for the trustee of an SMSF to run a fund is to split investments in it between those held for member accumulation accounts and member income stream accounts - where there is a pension or transition-to-retirement income stream. Tax-wise, any income or discounted capital gains (33-1/3 per cent discount) earned on accumulation account investments is taxable at the rate of 15 per cent, less any deductions such as life insurance, audit fees, etc.
In contrast, income and capital gains generated on the income stream or pension part of the SMSF is free of tax. This means that where a share is held by the trustee of the fund and the share has imputation credits, these can be used to offset the tax liability in relation to the payment of the grossed-up dividend. With an underlying 30 per cent tax offset on a fully franked dividend, there will be excess tax offsets for dividends received on both member accumulation and income accounts. In fact, the most beneficial is for shares paying franked dividends on the income stream side, as no tax is payable on the dividend, but the 30 per cent tax offset can still be claimed by the trustee of the fund. The fund may get a tax refund for paying no tax!
Other SMSF strategies
Space only allows me to cover my top four tips and strategies here. However, on the front page of the SMSF Strategies website is a link to an hour-long presentation on my top 10 strategies for 2012, including SMSF borrowing, the use of anti-detriment reserves, contributions reserves, and the high value of dividend imputation refunds.
About the author
Grant Abbott is the founder of SMSF Strategies. Watch a video or ask Grant a question.
ASX SMSFs product page provides useful information about the basics of establishing a fund. The page also features an ASX video on SMSFs, in which the television presenter Anne Fulwood interviews Graham O'Brien of ASX business development.
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