An enhanced concessional cotributions strategy
The following strategy is designed to enable clients to maximise their concessional contributions, especially for individuals aged 50 or over, who have a $100,000 annual concessional contributions cap until June 30, 2012.
The traditional transition to retirement non-commutable allocated pension (NCAP) strategy enables a client to maximise their retirement benefits due to the tax arbitrages created. The attraction of the enhanced strategy is that it potentially provides an individual aged 55 or over with the opportunity to take full advantage of the $100,000 per annum concessional contributions cap, which is available until June 30, 2012.
The increase in contributions to superannuation usually enhances the transition to retirement NCAP strategy, however, this may result in a reduced cash flow to the client. This can be solved by replacing this cash flow with a line of credit that is repaid when the client retires after age 60. Note that any borrowing costs (i.e, interest) incurred will not be tax deductible to an individual, as they are not necessarily incurred in gaining or producing assessable income.
In essence, the client effectively ends up with three sources of income, a NCAP, a line of credit and any other income such as employment income. Thus the tax benefits of contributing to super are increased, and the client objective of increased retirement benefits without impacting current lifestyle is also achieved.
Contribution rules and caps
Individuals will need to be able to satisfy contribution rules to be eligible to implement any of this strategy. A fund can accept any contributions made in respect of a member who is under age 65, regardless of their employment status. The contribution standards for individuals aged over 65 are more complex and are summarised in Table 1.
This strategy is designed to enable individuals to maximise their concessional contributions up to the concessional contributions cap. Concessional contributions include all employer contributions as well as personal contributions for which a deduction is claimed. Table 2 shows the concessional contribution caps for the 2007-08 financial year.
Additionally, individuals are subject to caps on the amount of non-concessional contributions that are contributed to superannuation. Non-concessional contributions include:
> member contributions for which a tax deduction is not claimed; and
> spouse contributions.
Table 3 shows the non-concessional contribution caps for 2007-08.
Who does the enhanced strategy suit?
This strategy will generally apply to individuals:
> aged between 55 and 65;
> who are willing to borrow to increase their retirement benefits; and
> who are at least cash flow neutral prior to implementing the strategy.
Step-by-step process
1. Calculate the client’s net income.
2. Transfer the client’s existing superannuation into a NCAP.
3. Calculate the optimal amount that the client should contribute to superannuation as a concessional contribution using the traditional NCAP strategy.
4. Arrange a line of credit facility with the client’s credit provider. The amount of the drawdown will be the difference between the client’s net income less after tax NCAP and other income.
5. Reduce the client’s salary further by maximising their concessional contributions.
6. Ensure the client is receiving the same net income as prior to the strategy by funding their income requirements from NCAP income, the line of credit and any other income.
7. Upon satisfying a condition of release (e.g, retirement) after age 60, the funds can be withdrawn tax free to repay the borrowings.
Issues to consider
1. Ensure the client’s superannuation guarantee payments are based on the total salary package and not the reduced salary package.
2. The client should have the ability to tolerate interest rate rises. Fixed rate loans can potentially mitigate this issue.
3. The client must be aware of preservation issues, particularly if they want to unwind the strategy prior to satisfying a condition of release.
4. Strategies that involve a line of credit will require the adviser to monitor the client’s budget to ensure that the line of credit is not abused.
5. This strategy will not be applicable to individuals who are already fully utilising their concessional contributions cap.
6. Investment risk — as debt needs to be repaid at some point in the future, the investment timeframe should ideally match the term of the loan.
Robert Thomas is the national manager of technical, research, advice and paraplanning at AXA.
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