Some super results

June 30 2007 is fast approaching and this year end of year tax planning needs to be done earlier than ever, because there is more that can be done. Early indicators suggest GPs are using the new superannuation rules to great advantage and it’s clear that for most the new touchstone for tax planning is 15% of taxable income, not 45% plus Medicare. In some cases GPs are getting such good results that tax payable, net of Family tax Benefits, is a negative amount, ie the government is paying them, not the other way around.

And the good news is by using self-managed super funds and investing in Australian shares index funds this can be done without unnecessary commissions and management fees. It’s simple, easy and cheap, and there is no need to involve hordes of middlemen in what is a straightforward investment exercise.

For the 2007 year the maximum age-based deductible contributions limits are:

To age 35 $ 15,260
35 to 50 $ 42,385
50 plus $105,113

The tax benefits attached to the contributions depend on your marginal tax rate. An indicative range of benefits in dollar values, net of the 15% contributions tax, is:

Contribution limit $15,260 $42,385 $105,113
30% plus Medicare $2,518 $6,993 $17,343
40% plus Medicare $4,043 $11,232 $27,854
45% plus Medicare $4,807 $13,351 $33,111

Self-employed GPs can claim a deduction for the first $5,000 of contributions plus 75% of the excess up to their age based limit.

On 1 July 2007 a set of simpler super rules come into play making super better than ever, with no reasonable benefits limits and no tax on most benefits paid after age 60. With tax breaks up to 31.5% of the amount contributed its pretty hard for a GP to now say “no” to extra super contributions.

How can you make a good situation even better?

Most GPs are married, and this means most GPs can superannuate their spouses as well as themselves, dramatically increasing their effective maximum contributions.

Many GPs have second positions, whether it’s with another practice or another organization, such as a division. The second employer can also superannuate the GP up to his or her age based limit, effectively doubling the maximum amount able to be put away, at least for this year.

A quirk in the rules means some self-employed GPs can also double the maximum amount able to be put away, again at least for this year. This strategy stops on 30 June 2007. And it includes GPs practising through practice trusts.

What if you do not have enough cash to pay large deductible contributions? Consider borrowing to pay all or some of the contributions. Interest on amounts borrowed to pay employer contributions is usually deductible, making this a smart investment strategy. Particularly if your super fund then invests in Australian shares or an Australian shares based index fund. And the tax benefit hedges you against a fall in the market, making this a very safe way to invest in shares.

Think about superannuating your parents. We have a couple of cases where cleaner parents have been superannuated for more than $200,000, generating more than $66,000 of cash benefits for the GP children. Or think about superannuating your kids, at least for the $1,500 super co-contribution rebate for low income earners.

You should definitely not pay back loans, particularly deductible business or investment loans, where you can still pay more deductible contributions. From now on it’s super first and debt reduction second. And then take the money out tax free at age 60 and pay the debt off, if you want to.