Andrew Lawless
With super more attractive from July 1, this year, your clients will generally want to take advantage of the $1 million transitional cap on undeducted and other non-concessional contributions between May 10, 2006, and June 30, 2007.
This may be relatively straightforward if the money is currently accessible. But what about clients who don’t expect to receive proceeds from the sale of a business, investment property or other ‘illiquid’ asset until after the transitional period?
Contributing after June 30, 2007
Where funds aren’t available until after June 30, 2007, your clients may still be able to invest some (or all) of the sale proceeds in super by:
~ using the reduced non-concessional contribution cap of $150,000 per annum (or up to $450,000 in one year if they are under age 65 in that year and don’t make further contributions in the following two years);
~ claiming the lifetime limit of up to $1 million when selling small business assets to fund their super (if available); and
~ getting a spouse (if applicable) to make super contributions using their own contribution caps.
Before considering any alternatives, you should determine how much your client would be able to get into super using these contribution opportunities.
Using a short-term loan
If the sale proceeds exceed the caps available after June 30, 2007, and/or your client is ineligible to contribute when the money is received (that is, they are over 65 and don’t meet the relevant work test), they may want to:
~ take out an interest-only loan;
~ make an undeducted contribution of up to $1 million before the end of this financial year; and
~ repay the loan when the sale is completed.
This strategy could enable them to get more money into super and receive more tax-free income at age 60 or over.
One downside is they’ll have to pay interest on the loan, which generally isn’t tax deductible.
They’ll also forgo potential investment earnings on the cash flow used to make the interest payments. As a result, the benefit of the strategy could be negative at the end of the loan period.
However, over the longer term, getting more money into super could more than compensate for the ‘costs’ of implementing this strategy.
Tips and traps
~ This strategy may not be as effective if your client doesn’t sell the asset when they expect to, or receive less than anticipated.
~ You should ensure your clients don’t exceed the relevant contribution caps, as penalties will apply.
~ Business owners may want to defer a sale until after June 30, 2007, when the basic conditions that determine whether your client will qualify for the small business capital gains tax (CGT concessions will be relaxed further.
Andrew Lawless is technical services manager at MLC .
