Elim­i­nate tax on in­vest­ment scheme

Business First - - NEWS -

The Aus­tralian Taxation Of­fice (ATO) has opened the door for a new re­lated party bor­row­ing strat­egy within Self-Man­aged Su­per Funds (SMSF) that has the po­ten­tial to elim­i­nate in­come tax on the in­vest­ment earn­ings of wealthy in­vestors.

Many ad­vis­ers mis­tak­enly be­lieve that bor­row­ing in SMSFs is limited to the ac­qui­si­tion of property, and that the in­ter­est rate charged by a re­lated party must be an arm’s length rate. This, how­ever, is not the case. With the cor­rect struc­ture, SMSFs can in fact bor­row to ef­fec­tively ac­quire as­sets such as cash, term de­posits and listed se­cu­ri­ties. Fur­ther, the funds can be lent to the SMSF with­out the re­quire­ment to pay in­ter­est.

“With the pos­si­bil­ity of lend­ing additional money to a SMSF with­out in­ter­est, our new bor­row­ing strat­egy has the po­ten­tial to com­pletely elim­i­nate tax payable on in­vest­ment in­come,” says David McKel­lar, char­tered ac­coun­tant and di­rec­tor of Mel­bourne-based Al­lied Busi­ness Ac­coun­tants.

“Take the ex­am­ple of some­one who has $2 mil­lion worth of in­vest­ments out­side of su­per. As­sum­ing an in­vest­ment re­turn of six per cent, this would be gen­er­at­ing in­come of $120,000, with tax li­a­bil­i­ties of up to $55,800 per an­num.

“Depend­ing on their age and cir­cum­stances, it may be pos­si­ble to make non-con­ces­sional con­tri­bu­tions of up to $150,000 per year into the fund. By bring­ing for­ward three years’ worth of con­tri­bu­tions, you could pay $450,000 into the SMSF right now.” How­ever, this still leaves more than $1.5 mil­lion in ex­posed out­side in­vest­ments with up to $43,245 payable in tax.

“If the re­main­ing $1.5 mil­lion was loaned to the SMSF, it could use the loan to pur­chase an in­vest­ment,” says McKel­lar. “The in­come from that in­vest­ment would then be earned by the fund and con­ces­sion­ally taxed as such. If the fund is in ‘pen­sion mode’, then the in­come of the fund is tax free.

“The re­sult is no in­come tax or cap­i­tal-gains tax be­ing payable, and a tax sav­ings of up to $55,800 per an­num.

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