A new strategy has been modelled that will allow clients who have hit the superannuation concessional contribution caps to continue to add to super.
The strategy, outlined by technical consulting company Strategy Steps, is restricted to self-managed superannuation fund (SMSF) clients and is based on a ‘member as lender’ borrowing strategy.
Strategy Steps director Louise Biti said the arrangement would allow SMSF members who have hit the superannuation concessional contribution (CC) caps to continue to contribute to super without the risk of breaching the caps.
Biti said the ‘member as lender’ strategy allowed SMSF investors to lend personal (non-superannuation) money to their SMSF, which could then be invested in assets with investment earnings taxed at the 15 per cent superannuation investment earnings rate, rather than at the member’s marginal tax rate.
Under the strategy the SMSF would pay a market interest rate on the loan being advanced to it by the SMSF investor. While that means some earnings would still be derived outside super and taxed at marginal tax rates, Biti said the difference between the net investment earnings in the SMSF and the loan interest rate could be significant in a positive market environment, and boosted further in the tax effective environment of super.
Biti said the strategy would be useful not only for those at risk of breaching the caps, but also for those who want the option of withdrawing money from their SMSF without meeting a condition of release.
Biti said in that instance, the loan can be repaid and the money returned to the member with only accumulated earnings remaining in the SMSF.
The technical group warned financial planners they must compare the benefits of the strategy against the cost of the loan arrangement, while careful documentation must also be kept to ensure all relevant rules for limited recourse loans are met.
The concessional caps are $25,000 a year for those aged under 50 and $50,000 a year for those over 50. The $50,000 cap will drop to $25,000 on 1 July, 2012, except for those with less than $500,000 in super. The non-concessional cap allows a further $150,000 per year in after-tax contributions.
Biti said the 50 per cent reduction to the caps made in last year’s Budget had made it more difficult for people in the over 50 age group to make meaningful contributions to super “at a time when many have the desire and means to do so”.
She said means testing for over 50s from July 2012 would further make it more difficult for pre-retirees to effectively save for retirement.
