Manage contributions tax within your Self Managed Super Fund

Super is an excellent way to invest money for your retirement and with the control offered by your own Self Managed Super Fund (SMSF), you can use the benefits of investing in super to help you reach your investment goals sooner.

Recent changes to legislation relating to superannuation have increased the attractiveness of super saving as well as the ability for everyone to contribute.

Macquarie's Unleash the power of super booklet outlines these changes, examines how these changes impact your share investments in your SMSF, and identifies ways you can potentially grow your wealth faster in your SMSF by borrowing to buy shares through instalments.

Tax Management Strategy for SMSFs

If you are contributing funds to your SMSF, contributions tax can have a significant impact on returns in the long-run. Macquarie Self Funding Instalments (“SFIs”) provide a simple way to potentially increase the number of franking credits available to your fund, providing the potential to offset contributions tax, while gaining long term share exposure.

SFIs are a popular investment within SMSFs for two reasons. Firstly, they provide the fund with exposure to a share for a fraction of the price of the share. Secondly, since a SMSF is taxed at 15% and company dividends may be franked at the company tax rate of 30% (assuming a fully franked dividend), the fund may be able to earn excess franking credits on any fully franked dividends on the underlying shares.* These excess franking credits may then be used to offset earnings and contribution tax liabilities. In addition, the leverage effect of SFIs may also increase the number of excess franking credits available to the fund.

Case Study: Introducing Andrew

Andrew has a SMSF. With recent improvements to laws concerning superannuation, he decides to start making yearly contributions of $50,000pa to his SMSF. Because Andrew’s SMSF pays 15% tax on these contributions, Andrew’s SMSF will be required to pay $7,500 in contributions tax each financial year.

Given Andrew’s SMSF contribution strategy, he decides to invest in shares that traditionally pay franked dividends. Any excess franking credits attached to such dividends may be used to offset other taxable income and reduce the $7,500pa in contributions tax.** Andrew currently has $250,000 in cash within his SMSF as part of a broad portfolio. He will invest $200,000 of this in gaining exposure to shares he believes will achieve capital growth and pay higher franked dividends

* MRE Economics research 8 May 2007 and MRE Equity Strategy research 9 May 2007.
** Tax treatment depends on individual investors circumstances, and current tax laws, which may vary.  Seek your own professional tax advice before investing.

What does Andrew want to achieve?

Andrew’s investment objectives for this portion of his portfolio are to:

  •  accelerate capital returns over the long term through investing in the share market
  •  generate higher franked dividend income
  •  increase the amount of franking credits to potentially reduce contributions tax on a yearly basis
  •  have an investment which requires minimal administration

Andrew’s decision

Before investing, Andrew decides to compare the potential effect of using SFIs instead of a direct investment in shares. In particular, he notes the increase in expected dividend yield offered by SFIs.

  Share SFIs
  ANZ  CBA   NAB  WBC  ANZSMV CBASMW NABSMW WBCSMW
Price $28.71  $54.68 $40.60    $25.85  $13.31  $26.64  $19.43  $12.82
Expected Dividends ($pa) $1.41  $2.64  $1.84  $1.36  $1.41  $2.64  $1.84  $1.36
Expected Dividends (%pa)  4.9%  4.8%  4.5% 5.3% 10.6% 9.9% 9.5% 10.6%
Expected Franking Level  100%  100%  90% 100% 100% 100% 90% 100%

Illustrative prices only. Actual figures may differ materially.

Summary

The following table illustrates that by gaining exposure to this portfolio of shares, Andrew may generate $2,092.08 in excess franking credits from the fully franked dividends. The excess franking credits can then be used to offset the tax liability of contributing $13,947.20 to the SMSF. With Andrew expecting to contribute $50,000 on a yearly basis, he would reduce his contributions tax liability from $7,500.00 to $5,407.92pa.

By contrast, investing in the SFI portfolio may accelerate the number of excess franking credits. Andrew may generate $7,600.39 in excess franking credits. This may offset the tax liability on contributions up to $50,669.27. As a result Andrew may reduce his contributions tax liability from $7,500.00 to zero and a refund of $100.39pa.

Before investing, however, Andrew should be aware that there is no guarantee that the underlying shares will pay any dividends and he may need to adjust the amount he invests accordingly.

  Expected Excess Franking
Credits (12 months)		 Tax Shelter (Earnings
and Contributions)
Shares 
ANZ $526.03  $3,506.87
CBA $517.06 $3,447.07
NAB $485.37 $3,235.80
WBC $563.62 $3,757.47
Total $2,092.08 $13,947.20
Self Funding Instalments  
ANZSMV $1,950.61 $13,004.07
CBASMV  $1,773.86  $11,825.73
NABSMV  $2,028.99 $13,526.60
WBCSMV  $1,846.93 $12,312.87
Total  $7,600.39 $50,669.27

Illustrative prices only. Actual figures may differ materially.

Outcome 1: Using Shares

Outcome 2: Using SFIs

Illustrative prices only. Actual prices may differ materially.

How do you implement this strategy?

  •  Contact Macquarie and obtain or download the SFI PDS (and any relevant Supplementary PDS)
  •  Read the SFI PDS (and any relevant Supplementary PDS) and check the SFI website for any relevant information, such as current second payments
  •  Complete and submit the white Cash Application Form
  •  Macquarie will process your application and once completed will send you a Confirmation Statement
  •  Check the value of your SFI by contacting Macquarie or view the SFI Indicative Pricing sheet

Key Benefits of Self Funding Instalments

  •  Ability to potentially accelerate capital growth
  •  Geared share exposure with no margin calls
  •  Optional second payment
  •  No ongoing payments - cash flow neutral*
  •  Low administration
  •  Potentially tax effective – interest deductibility and franking credits

Find out more about Instalments

Any questions or queries, contact Macquarie on 1800 803 010.

* Subject to providing a TFN/ABN or relevant exemption.

About Macquarie Bank (Warrants and Structured Products Issuer)

Macquarie Bank has established itself as the market leader in the Warrants and Structured Products market for over 15 years.  As the inaugural issuer of the first ASX listed warrant in 1991, Macquarie’s long standing presence in the market has allowed it to continue to innovate new and exciting products for a variety of investor groups.

This general advice by Macquarie Bank Limited ABN 46 008 583 542 (‘Macquarie’) doesn’t take into account what you currently have, or what you want and need for your financial future. You should consider these matters and read the relevant Product Disclosure Statement (“PDS”), including any supplementary PDS, for the Macquarie Instalments in which you are interested before making an investment decision.

This advice is not an offer of securities or an invitation to apply for Macquarie Instalments. References to any entity (other than Macquarie) or security are included solely for illustrative purposes. They should not be construed as any recommendation by Macquarie in respect of the entity, its securities or products and services. No returns shown in this document are forecasts or predictions of performance. Actual performance may differ materially. Macquarie Group, its employees and officers may have interests in the financial products referred to in this advice by acting in various roles (including as director, investment banker, underwriter or dealer, holder of principal positions, broker, lender or adviser) and may receive fees for so acting. It may effect transactions which are inconsistent with any recommendations in the advice. Macquarie will receive remuneration and pay commission to introducing advisers as described in the PDS. Macquarie does not give tax advice. Any tax discussion is based on laws current at the time of writing, which may change. How tax laws apply to you depends on your circumstances; so, seek professional advice. Information is current at 26 November and may change without notice. © Macquarie Group