These clients have agreed to share their story. Everyone’s situation is different, so their choices and outcomes will be different to yours. Consider your circumstances before deciding what’s right for you. The names and identifying details in the below case study and accompanying testimonial have been changed to protect the privacy of individuals.
Our clients, Russell and Sandra Hills (age 55), had an existing family trust which held a commercial property worth $1.2m. The property was leased out and provided $95,000 per annum in income. The couple also had an investment company which held $1.7m of Australian listed shares, and had an established SMSF with around $900,000 of assets.
The clients were interested to optimise the tax position of their various investments by using the low tax environment that the SMSF enjoyed.
Through Blueprint Wealth we arranged to have the commercial property sold into the SMSF at its value of $1.2m. Of the consideration, $900,000 was paid in specie as a $450,000 non-concessional contribution from each of Russell and Sandra, the maximum non-concessional contribution under the three-year bring-forward rule. The remaining $300,000 was paid for in cash by the SMSF. Total assets in the SMSF now totalled $1.8m, of which 50% was tax free (from the non-concessional contributions) and 50% was taxable.
Having retired and therefore having met a condition of release within their super fund, Blueprint then arranged for the couple to receive a pension from the SMSF sufficient to meet the couple’s income requirement of $160,000 per annum. Because the SMSF was now in pension phase the income stream from the commercial property to the SMSF was tax free.
Their previous income stream before the strategy was implemented included $95,000 rent from the commercial property and $65,000 in dividends from the investment company, all of which was taxed at the couple’s respective marginal tax rates (with tax credits for the relevant franked dividends). After implementation of the strategy, the couple received the $160,000 as a pension income, of which 50% was tax free and 50% was at the marginal tax rate, but with a 15% tax credit offset. Meanwhile the investment company could accumulate the dividends and franking credits from the share investments because that income stream was no longer required to be paid out to Russell and Sarah. Overall tax savings for the couple was in excess of $25,000 per annum.
The keys to the success of this strategy were:
- The ability to move commercial property into the SMSF even from a related party. This would not be possible with a retail superannuation fund.
- The utilisation of the non-concessional contribution rules to make the property transfer in-specie.
- The use of non-concessional contributions to create highly tax free member account balances.
- The use of pension payments to bring the SMSF into pension phase and allow it to accrue investment earnings tax free.
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