FEA Strategy - Have your superannuation plus additional money

Written on the 30th of April 2009

With the changes to superannuation effective from July 2007, restrictions are now imposed on the amount that can be contributed into a superannuation fund as a deductible contribution. Alternative tax-effective wealth building strategies need to be considered.
With the changes to superannuation effective from strategies need to be considered.

Background

Under the current superannuation rules, individuals are unable to make annual contributions to their superannuation funds in excess of $50,000 for persons under the age of 50 years or $100,000 for persons aged from 50 to 74 years, without the excess amounts attracting taxation.

If the total tax deductible contribution exceeds the $50,000 or $100,000 limit (depending on age), the Australian Taxation Office will issue an assessment for tax at the rate of 31.5% for the amount of contributions paid in excess of the limit. This tax is on top of the 15% contribution tax paid by the superannuation fund.

Consider this example. Michael is a doctor in his early 50s, employed by two arms length employers. Each employer could have paid up to the maximum contribution possible to Michael’s employee superannuation fund, thereby doubling Michael’s ability to save through the tax effective avenue of superannuation. As a result of the superannuation rule changes, Michael will have to pay additional personal tax in respect of contributions to his superannuation fund in excess of $100,000. However, an investment in FEA Plantations Project 2008 (Project) may help.

Strategy

Let’s make a couple of assumptions: Michael has a taxable income of $250,000 and he makes his allowable tax deductible superannuation contribution of $100,000, leaving income on which to pay tax of $150,000.

What if we could reduce this to $50,000?

The tax saved would be $39,000, including the Medicare levy.

A deduction can be obtained this year by investing approximately $100,000 (plus GST) in the Project funded by a seven year principal & interest loan at 9.5% with a 10% deposit and no loan application fee. Michael could make a similar investment in future years. The Project’s potential future income received from the thinning and clearfall harvest will be assessable income.

Solution

The investment made by Michael in the Project would produce the following results:

*	This summary assumes the investment in the Project comprises Option 1, Option 2 or Option 3 Woodlots (or a combination of these). Calculations assume that the taxpayer has private health insurance and is not entitled to any allowances or rebates. Any entitlement to the low income rebate is not factored into these calculations.
**	This interest rate is indicative only. Finance is subject to approval by Forest Enterprises Australia Limited in its sole discretion.

The total of Michael’s tax saving and GST refund is equal to more than the first 30 months of principal and interest payments on the investment loan. This should provide him plenty of time to arrange his finances to meet the subsequent loan repayments. The tax deductibility of the interest on the investment loan will also assist.

Results

An investment in forestry is made, providing the potential for harvest income around years 9, 13, 16, 18 & 25 of the Project;
Through adding an investment in the Project to his existing investment portfolio, Michael may benefit from asset diversification and the negative correlation generally associated with forestry investments compared with other asset classes.

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FEA Strategy - Have your superannuation plus additional money

Background

Strategy

Solution

Results

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