Introduction

2. Introduction • Simple Super creates planning opportunities for the self-employed, the wealthy and high income earners • Succession of decreasing tax rates hasn’t hurt either • It’s a great time to be 55, or close to 55 • Intergenerational financial planning principles: be nice to relatives over age 60 • Average tax rates about or below 15% are quite achievable • Further benefits from negative taxes, such as the family tax assistance package and superannuation co-contribution can be achieved

3. Our approach today • A brief summary of the principles followed by specific and practical examples based on client advices • Examples are based on professional practices • Examples can be modified to apply to other businesses • Purpose is to show how to integrate super planning into general financial planning

4. The basic idea • Government policy: self-sufficiency in retirement • Three deliberate government incentives: • Contribution deductions • Low or no tax on fund earnings • Low or no tax on benefits • Instructive to use these headings to explore the planning strategies open to clients

5. A cautionary note Potential conflict between the super law and the tax law: • superannuation law sole purpose test; and • taxation law: rule against schemes for the sole or dominant purpose of obtaining a tax benefit and specific statutory deduction rules Apparent resolution of potential conflict: • Ryan’s Case and TD 2005/29: in summary ensure all arrangements are genuine and substantially for the retirement benefit of the employee/member. ATO accepts that Part IVA will not apply to super strategies involving genuine employees and real retirement benefits • ATO accepts that contribution deductions are not connected to the market value of work done, but are statutory rules based on age • when is a arrangement genuine? Rough rule of thumb: when the monies stay in the fund and are used for genuine retirement purposes (such as paying a pension to a member over age 60).

6. Summary of rules for taxing fund income a

7. Why invest through super? In summary: • generous contribution deduction rules mean that you have more to invest than otherwise would be the case • rules for taxing fund income and other super rules combine to create a government approved tax haven where any asset will grow faster by compounding earnings and contributions in a low or no tax environment • gearing possible, both external gearing and internal gearing, with tax arbitrage benefits are available • generally, benefits are protected against bankruptcy • low or no tax on the withdrawal of benefits

8. A very quick summary of the concessional contributions rules In summary, for the year ending 30 June 2008: • under age 65 no restrictions • age 65 to 75 40 hour 30 day part time employment rule • over age 75 no contributions possible • over age 50 $100,000 per member • under age 50 $50,000 per member

9. Making the most of the concessional contributions rules Ideas include: • Maximum contributions up to age based limits of $50,000 and $100,000 • contributions for related persons such as spouses, parents and children • borrowing to pay concessional contributions • in-species (ie non-cash) contributions • simultaneous contributions and pensions • benefits re-cycling

10. Contributions for related persons Structure financial planning practice so related persons are genuinely employed in the enterprise and then superannuate them up to age based maximum Example 1: 51 year old self employed financial planner employs his 51 year old spouse in practice. Market salary is $20,000 a year. Super limit is $100,000 per spouse. Practice makes $240,000 a year profit. Two dependant children age 16 and 18. Income Tax % Profit $20,000 $2,100 10.5% Spouse’s salary $20,000 $2,100 10.5% Super $100,000 $15,000 15% Spouse’s super $100,000 $15,000 15% Family tax benefit - ($5,000) - Super co-contribution (4) - ($4,000) - Total $240,000 $25,200 10.50%

11. Borrowing to pay deductible super contributions Problem: where does the cash come from? Solution: borrow it. Or part of it. Comments • Significant cash flow advantages • Fundamentally a form of gearing an investment: makes sense commercially even without tax benefits because the long term average earnings will be greater than the long term average interest costs • Interest on borrowings for self-employed person’s contributions not deductible but consider indirect gearing and revolving credit facilities • Interest on borrowings for employee contributions is deductible. Or is it? • document the catch up aspect of contributions above market reward • consider a revolving credit facility, and rapid repayment of the borrowed amount • consider cash flow management techniques to avoid direct borrowings • members can withdraw benefits at 55, 60 and 65 and use cash to pay interest or repay principal (conditions apply under 65, and tax charges may apply under 60)

12. Cash flow effect Very cash flow efficient Cash flow from practice $240,000 Tax paid by financial planner $2,100 Tax paid by spouse $2,100 Family tax benefit ($4,000) Available cash flow $239,800 (NB contributions paid using debt and SMSF tax on contributions in effect paid using debt)

13. Some nice side effects • Cash flow management benefits • vary current year instalments in anticipation of large deduction? • automatically lowers next year’s tax instalment payments • cash flow enhancement can be directed at non-deductible debt, such as home loan and consumer credit card debt • helps cope with high and rising interest rates • tax on contributions is geared, ie paid using borrowed funds, therefore overall effect is (very) cash flow positive • Sound investment strategy • gearing fundamentally makes good commercial sense before tax benefits are considered • tax benefit helps hedge against risk of falling market • dovetail with dollar cost averaging based investment techniques • Family tax assistance? • Benefits may be greater than personal tax liabilities, therefore negative tax overall

14. Super contributions for parents? Consider a real client question Facts Three siblings run a financial planning practice. Parents work full time as cleaners and receptionists. Questions First question: can the practice superannuate each parent up to the age based limit? Answer: Yes. Second question: can the contributions be geared? Answer: Yes. Further thoughts include: • equal contribution by each child reduces prospects of dispute in subsequent years • if unequal contribution consider estate planning techniques including BDBN forms • contributions invested in real investments and will be used to pay pensions to parents • parents under-paid in prior years • documentation, revolving credit facility and ensure rapid repayment of loans • need to use individual or trust based ownership structure to avoid private company loan problem • Effective way of supporting elderly parents who will not receive the old age pension • Eventually three children will inherit unused super benefits • Consider potential impact on Centrelink benefits

15. Super contributions for parents over age 60 Business or Investment Vehicle Parents’ SMSF Invests tax free) Deductible Contributions Optional third party borrowings Pension benefits to parents (Tax free) • Parents must be genuine employees and pass work test if over 65 • Interest on any third party borrowings is deductible provided the amount of the contributions is commercial • Consider revolving credit facility and cash flow management techniques • Benefits must be used to pay pensions to members, ie the parents • Can be a very tax effective way to help support elderly parents • Consider in-house loans to the Parent’s SMSF • Benefits must be used to pay real pensions

16. Superannuation contributions for children Consider a real client example 18 year old daughter works one day a week as a receptionist in a specialist practice Question Can the daughter be superannuated up to her age based limit of $50,000? Answer Yes Further thoughts include: • consider FLA complications if daughter divorces in later life • consider vesting rules: they are real. Money locked up until age 55, ie, 37 years • more suited to high wealth and high income family groups where significant inheritances are expected and where the parents do not need the superannuation to cover their own retirement living costs • on balance, limited commercial applicability • what if daughter physically or mentally disabled? More applicability here? • Consider funding $1,000 non-concessional contribution for daughter to qualify for $1,500 low income earner super co-contribution • Is interest on any amount borrowed deductible? Possibly not. Therefore avoid direct borrowings for these specific purposes

17. Non-concessional contributions The basic idea • Contributions that are not deductible to the payer or assessable to the fund • $150,000 per member per year or $450,00 per member per three years • For a married couple this means total NCC of $1,800,000 can be made in a three years and one day period. • NCC are preserved Our view • NCC limits not an issue for most people • NCC have been made redundant by new rules for SMSFs borrowing, particularly for members under 55 • SMSFs can borrow from related persons and in some circumstances the borrowing can be interest free. • SMSF borrowings can be set up to be are effectively an unpreserved NCC

18. New Section 67(4A) SISASMSFs Borrowing to invest The basic idea Previously narrow exemption for general prohibition against SMSFs borrowing widened so generally SMSFs can now borrow to invest What are the limits? • limited recourse loan only • asset must not be an in-house asset • asset must be held on trust so that beneficial ownership passes on the payment of one or more installment What does the new section 67(4A) not say? • the borrowing cannot be from a related party • the borrowing has to be secured • the borrowing cannot be interest free • the borrowing has to be repaid in a specified period

19. Advantages of in-house lending to SMSFs • Income derived in a low tax environment (ie 15% now and 0% once a pension starts) rather than a high tax environment. • Can be integrated with concessional contributions strategy, ie repay $50,000 cash each year and then re-contribute it in a deductible form. • Can create a pseudo super pension via tax free principal repayments. • Capital gain derived tax free by deferring disposal until after age 55 and the start of a pension, and otherwise is only 10% (after first 12 months). • Loan can be re-paid at any time, hence no preservation effect on loan amount (earnings are preserved). • Loan can be interest free for, say, 30 years, thereby achieving asset protection advantages. • No age limit on lending to your SMSF. Over age 65 and not working? Not a problem. • Investment earnings transferred to SMSF are economically the equivalent of further concessional contributions outside the age based limits. • Much better idea than non-concessional contributions: no cap and no preservation on loan amount.

20. Planning Opportunity: Lending to SMSFs Lends Capital Optional Principal Repayment Dr John John’s SMSF • Loan is unsecured and interest free for 30 years, with optional principal repayments • SMSF invests in assets expected to generate long term unrealized (ie tax free) capital gains, such as residential property. • Optional principal repayment comprise a pseudo tax-free pension • Loan is non-recourse, which means only the new assets are at risk • Loan monies must be used to buy new assets • New assets must be held on trust for the SMSF by an instalment trust • SMSF has a right to acquire ownership of the asset by paying an instalment to the instalment trust (but not an obligation)

21. More on SMSFs Borrowing More generally, thefull potential of SMSF lending rules not yet appreciated • Potentially SMSF lending rules mean that anyone over age 60 or who is related to someone over age 60 can invest, via loans, tax free provided the investment is structured correctly. • If the lender directly borrows money to on-lend to the SMSF, matching interest rate needed but consider indirect borrowing methods and cash management techniques to minimize after tax cost of external borrowings. • Real potential for SMSF borrowing rules does not lie with off the shelf high interest products but with careful integration of a client’s SMSF strategy with a clients’ overall financial planning strategies. • Interest costs and other charges must be limited for the strategies to work. • Off the shelf products cost too much. DIY is better.

22. Transition to retirement pension Background and general idea • Simple non-commutable pension paid to a member after age 55 while still employed • Started 1 July 2005. Intended to keep older workers in workforce • Investment earnings on pension assets tax free • Pension income tax free after 60, 15% rebate between 55 and 60 • Spill over effect on non-super investment income: couple eligible for the senior Australians tax offset can derive first $43,360 tax free TRP more effective when member’s (or spouse’s) taxable income lower and fund balances or tax liability higher

23. A TRP Example Facts: John, 55, earns $100,000 pa and has $500,000 in super. Betty, his wife, does not work. Strategy: John starts TRP of $33,000 pa and salary sacrifices $60,000 of super. After tax income/cash flow the same, but $27,000 extra in super. Variations on the strategy: • Can be used by self-employed persons too • Set the levers to end up with more cash flow rather than more super • Combine TRP with spouse contributions transfers and take pension or lump sum benefits tax free via older low income spouse (or a spouse who intends to retire earlier) • Use other tax planning strategies to reduce John’s taxable income • Work fewer hours, ie work/lifestyle balance • Can be combined with $1,500 super co-contribution strategies • If spouse is older can be combined with spouse super split strategies

24. Transition to retirement pension: No spouse contribution split Deductible Contributions Pension (15% rebate or tax free) Dr John’s SMSF Dr John Points to note: Pension must be non-commutable Minimum amount generally 4% SMSF invests tax free Pension income subject to rebate between age 55 and 60 Pension income tax free after age 60 TRP virtually mandatory at age 60 TRP will make sense before age 60 depending on the member’s tax profile and the SMSF’s tax profile

25. Transition to retirement pension: with spouse contribution split Deductible Contributions Dr John Tax Free Pension SMSF Mrs John • Points to note: • As per previous slide • Generally makes sense to split contributions to the older spouse or the spouse who intends to retire first, after age 55 • Maximizes the tax free investment period • Minimizes the preservation period/effect • No downside. • NB FLA rules re superannuation benefits

26. Deductible contributions as a tax favored debt reduction facility MAIN POINTS • Large deductible contributions in effect create an ability to re-pay debt using tax favored dollars. • Clients age 50 or more in particular may win by increasing super, and deferring principal repayments and even deferring interest payments • The closer to age 50, and the higher the marginal tax rate, the greater the tax benefit • Much of the press commentary twists the analysis by assuming very low rate of growth in the underlying investments

27. Deductible contributions as a debt reduction device: example Facts John is age 55 and has a non-deductible home loan of $500,000. John earns $200,000 a year as an employee doctor. Strategy Salary sacrifice $100,000 a year for five years to a SMSF and defer all principal repayments for five years. At end of fifth year retire at age 60 and withdraw $500,000 tax free from the SMSF and repay non-deductible home loan. Advantages • John has paid back the home loan using tax favored income rather than after tax income. Assuming an average tax rate of 40%, the after tax cost of the principal repayments have been reduced by 25% (ie 40% less 15%). • Extra earnings on SMSF investments probably outweigh extra interest costs (based on long term average investment earnings). • Simple and safe strategy • At age 60 John can re-consider the retirement issue and make up his mind whether to retire or not depending on circumstances that exist at that time.