Can Bob Make a Substantially Self-Employed Contribution to Super - Assignment Example

1. Calculation of tax Estimate of their 2012-2013 income is: Bob Jenni Salary 62,000 36,000 Rent 6,000 6,000 Capital Gain on transfer of shares To SMSF 38,000 Investment income from Share that were inherited 70,000 Investment income from 22,000 Margin loan Total 68,000 172,000 Less super contribution 0 20,000 Taxable income 68,000 152,000 Calculate the tax payable for both Bob and Jenni and in particular any rebates or offsets that may be available to them both. The following table is used in taxing the personal income. Taxable income Tax on this income Effective tax rate 0 – $18,200 Nil 0% $18,201 – $37,000 19c for each $1 over $18,200 0 – 9.7% $37,001 – $80,000 $3,572 plus 32.5c for each $1 over $37,000 9.7 – 21.9% $80,001 – $180,000 $17,547 plus 37c for each $1 over $80,000 21.9 – 30.3% $180,001 and over $54,547 plus 45c for each $1 over $180,000 30.3 – 44.9% Bob‘s tax 68,000- 56,000 = 12,000 No tax payable on $12,000 $56,000 is taxed separately using 56,000 * 0.15 = 8400 Jenni’s tax 152,000- 180,000 =28,000 $17,547 + 37/100 0f 28,000 = $17, 547+ $10,360 = $ 27,907 Total tax payable by both = $ 27, 907 + 8400 =$ 36, 307 1. Can Bob make a substantially self-employed contribution to super? Bob is 67 but does not plan to work at this stage although he has been offered part-time employment. How could he meet the work test to contribute to super after 1 July 2012? Bob cannot make a substantially self-employed contribution to super because the superannuation act dictates that, legibility must be attained on this contribution by seeking part time job upon retirement (Beal, MacKeown & Davidson, 2001). It is imperative to note that, this condition is not workable on Bob’s choices since he is not ready to take up a part time job. Thus, Bob fails the “work test” since he does not enjoy contributions from the employer and lacks a salary sacrifice contribution as well. However, Bob can claim tax deduction on his contribution to the super from his self-employment income. It is significant for Bob to employ a favourable tax strategy to enjoy low tax rates for his super fund since benefits for persons who retire above 60 years of age are tax exempt. Contributions on this case do not require one to be working. It is notable that the government encourages retired employees to work for fewer hours a month after retire such that, it can enhance old population working class. This means majority of the people will be able to access the super fund at much older age. They already have $1.4m in super. What are the taxation consequences if Bob was to withdraw $1 million out of the fund to invest in a motel complex in Fiji? Could this investment be made directly by the super fund? Immense tax implications are evident in this situation. The superannuation act requires the investment to satisfy the core purpose of the fund. Withdrawal of lump sum funds of persons above 65 years is tax-free (Beal, MacKeown & Davidson, 2001). Since Bob is above 65 years of age thus the property in his pension is tax exempt. Therefore, Bob can make the invest and rent out whose income will be accredited to the super fund. Consequently, Bob will have no capital gain tax liability since electing to buy an allotted pension within an SMSF is CGT exempt. In fact, this strategy will serve him right since transfer of the property from the super fund to him will benefit tax exemption since it will not involve capital gain liability. However, it noteworthy that the amount being invested is beyond the limit, thus direct investment of the money to the super is not possible as per the provisions of the self-manage super fund. 4. Jenni will be 59 in January 2013. Does this make any difference to the amount that she could contribute to the super fund? It does not change the amount contributed to the super fund. This is because; it is a government policy for every person to contribute $25,000 for the year 2012-2013, regardless of age or super balance. However, the nature of Jenni’s contributions to super varies from concessional to non-concessional contributions. Thus, her non-concessional contributions to the fund are limited to $150, 000 by the superannuation law. However, these contributions receive special tax treatment. This implies that they are not taxable in the super fund. In, additional, Jenni can make higher non-concessional contributions since she is below 65 years of age. The flexibility of non-concessional contributions allows her to bring ahead two years value of non-concessional input. 5. How will the money paid for unused long service leave and annual leave be treated for income tax purposes? Essentially, the universal form of ordinary annihilation payments is leave payments for accrued yearly leave and long service leave (Beal, MacKeown & Davidson, 2001). In other words, this payment refers to lump sum recompense in lieu of idle annual or long service leave. These payments are not classified, as ETPs consequently cannot be rolled over. It is significant to note that, taxation on these payments cannot be distorted or decreased; instead, they are entitled to concessional tax treatment. This specialty in taxation compels separate recording in payment summary and on tax returns (Beal, MacKeown & Davidson, 2001). Appropriate weekly, fortnightly or monthly tax tables can be used to calculate the PAYG withholding amount. It is imperative to note that, the net after-tax worth of these payments can be contributed to a super fund. This can be done by personal or spouse contribution. An example of weekly taxation trend on long leave payments is illustrated in excels spreadsheet. Provide brief advice as to how their finances could be restructured to be more tax effective. It is imperative to note that, Bob and Jennie require advice on the taxation structure. This will facilitate clear-cut decision making on their finances (Beal, MacKeown & Davidson, 2001). For instance, Bob should separate long leave payments and annual accrued payments from his salary. A weekly taxation table should be used to tax these payments. Additionally, investing the money in motel will compel Bob to pay tax at the rate of 46.5% (Beal, MacKeown & Davidson, 2001). It is advisable for Bob to make the investment indirectly. For instance to rent the Motel and the money generated credited to the fund will be the best strategy compared to investing directly. In fact, the Australian taxation system is among the complex tax structures in the world. It is notable that, various incomes are taxed differently. For instance, the funds from the super fund are taxed depending on the, whether the money is conciliatory or non-conciliatory (Beal, MacKeown & Davidson, 2001). More over, the super fund should be noted that, the super fund must satisfy one of the three purpose tests, which include payback to members in the event of their sequestration from trade or profession, benefits upon the attainment of 65 years of age and benefits to dependants the event of the death of the contributor. Advice Bob and Jenni as per the issues raised above Given that Bob and Jenni are seeking to put their income into a retirement plan it is fundamental to adopt a superannuation fund management strategy that is tax friendly. First, the nature of their wealth and source of income determine how the superannuation fund is to be managed to achieve maximum tax exemption offered by the government to superannuation funds. In this approach both Bob and Jenni will attain maximum income from their superannuation plan since the superannuation funds are taxed differently from non-superannuation funds. The policies governing the utilization and implementation of superannuation funds offers well laid structures to choose from depending on an individual’s income (Richard, 2011). In this particular case, I recommend would that Bob takes on a part-time employment so that both Bob and Jenni can implement a self managed superannuation fund for their pension plan. Thus, Bob would be able to make contributions to the supper fund from his salary as Jenni does. This is essential to facilitate them to embark on a self managed fund strategy under the accumulation funds, which would operate under the bank account principle. Consequently the money will be accumulated and the final value of amount accumulated reflects on the benefits in accordance with the level of the contributions made by the member, the employer as well time of the fund and its performance. Alternatively, Bob and Jenni could adopt a defined benefits fund, which requires a member to make a certain amount of contribution to the fund usually a percentage of their salary whereas the government contributes the remaining amount to meet the benefit. This is a secure superannuation option since the employer is liable for risks and the life expectancy is factored in the plan as well. Superannuation funds under this scheme are taxed at only 15% and both Jenni and Bob will have the privilege to manage their own funds. Precisely, the couple will be fully in charge in of their superannuation fund. Furthermore, there is considerable cost saving as compared to other superannuation schemes. However, it is mandatory to comply with the regulations of the superannuation funds that manage their implementation. For instance, the superannuation fund must meet the sole purpose test, which dictates that the funds and benefits can only be resealed at retirement age of upon death to the dependants of the member. It is worthwhile for both Bob and Jenni to structure their income from personal investments to benefit from tax exemption that is provided for superannuation funds once a member attains sixty years of age. In addition, a member under the age of sixty years also enjoys friendly taxation with rebates on pensions (Richard, 2011). Lastly, I would recommend that Job and Jenny to set up a trustee for their superannuation fund. This comes with a wide range of benefits. First, as the trustee of their superannuation fund, the couple will have full knowledge of the performance of the fund. Furthermore, the fund is is highly personalized hence the fund can receive unlimited contributions and pays high retirement. Another advantage is that the member can purchase their personal assets through their superannuation fund. In additional, the couple may opt to convert personal managed taxable assets to super funds or pension section with minimal taxation. It is commendable for both Jenni to adopt this strategy to transfer their taxable assets to supper fund thus evade heavy taxation imposed to non-supper assets. Thus, they will boost the performance of the super fund. However, I would highly recommend that they take caution not to loan or buy assets from relatives since it is prohibited by the taxation law (Richard, 2001). It is crucial to observe taxation laws and regulations since a breach of the laws would lead to undesirable consequences such as losing tax concessions and benefits that a member is entitled to under the self managed superannuation fund (Richard, 2011). References Beal, D. J., McKeown, W., & Davidson, S. (2001). Personal finance. Brisbane: Wiley. Richard, K. (2011). Australian Taxation Law Cases 2011. Thomson Reuters Australia, Limited.ISBN086460694X, 9780864606945. Read More