FPC003_T3_v14

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Document classification: Confidential Topic 3: Contribution strategies Disclaimer These materials are issued by Kaplan Higher Education on the understanding that: • Kaplan Higher Education and individual contributors are not responsible for the results of any action taken on the basis of information in these materials, nor for any errors or omissions; and • Kaplan Higher Education and individual contributors expressly disclaim all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by such a person in reliance, whether whole or partial, upon the whole or any part of the contents of these materials; and • Kaplan Higher Education and individual contributors do not purport to provide legal or other expert advice in these materials and if legal or other expert advice is required, the services of a competent professional person should be sought. The views expressed by presenters delivering course material by lecture or workshop may not necessarily be those of Kaplan Professional. Copyright Published by Kaplan Professional Sydney. © Kaplan Higher Education Pty Ltd 2023 trading as Kaplan Professional. All rights strictly reserved. No part of these materials covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, taping or information retrieval systems) without the written permission of Kaplan Higher Education. Kaplan Higher Education makes every effort to contact copyright owners and request permission for all copyright material reproduced. However, despite our best efforts, there may be instances where we have been unable to trace or contact copyright holders. If notified, Kaplan Higher Education will ensure full acknowledgement of the use of copyright material. Acknowledgements All ASX material is © ASX Limited. All rights reserved. All ASX material is reproduced by the publisher with the permission of ASX Limited. No part of this material may be photocopied, reproduced, stored in a retrieval system, or transmitted in any form or by any means, whether electronic, mechanical or otherwise, without the prior written permission of ASX Limited.

Topic 3: Contribution strategies Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education FPC003 Superannuation and Retirement Advice Contents Overview .......................................................................................................................... 3.1 Topic learning outcomes ....................................................................................................................... 3.1 1 Introduction to contribution strategies ................................................................. 3.2 2 Case study 1: Career-starter contribution strategy ................................................ 3.4 3 Case study 2: Wealth accumulator contribution strategy ...................................... 3.8 4 Case study 3: Pre-retirement contribution strategy ............................................. 3.12 Summary ........................................................................................................................ 3.16 Suggested answers ......................................................................................................... 3.16 Reference list ................................................................................................................. 3.18

3.1 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Overview This topic introduces students to the concept of advice and recommendations in terms of contribution strategies. One of the main drivers of wealth accumulation for retirement purposes is contributions to superannuation. In fact, contributions are so important that successive governments have made changes that essentially restricted the amounts that can be contributed to superannuation and the tax treatment of those contributions in order to balance the need for retirement savings with the benefits obtained during a person’s wor king life. This would ensure contributions are more closely aligned with future needs than with short-term tax advantages for the supposedly wealthy. This topic looks at ways to maximise the benefits associated with contributions to assist clients with a range of financial planning needs and goals. This topic specifically addresses the following subject learning outcomes: 2. Critically analyse key elements of superannuation including the contribution, accumulation and payment of benefits. 3. Identify and critique retirement planning strategies and formulate solutions for client situations. Topic learning outcomes On completing this topic, students should be able to: • identify and devise strategies to maximise contributions to superannuation in a variety of client situations • articulate the benefit of adopting such strategies in order to optimise taxation and other outcomes • outline the steps involved in taxpayers potentially being eligible for the small business CGT concessions and interactions with contributing the proceeds to superannuation.

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3.2 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education 1 Introduction to contribution strategies The dominant purpose of making superannuation contributions is to assist in the accumulation of wealth in a tax-sheltered environment for use when the client is no longer working and can gain access to a concessionally taxed income stream or lump sum. Superannuation guarantee (SG) contributions will automatically be made for everyone in Australia who works, and some will make additional contributions to assist in achieving their retirement goals. However, there are other reasons why a person may wish to make contributions to superannuation, for example to reduce a tax liability; to provide support for a spouse, child, or close friend; to manage spending; to save for a deposit for a home; or to convert their business success into an asset for their retirement. This topic will look at what clients can or may choose to do to address these needs. Focusing on clients’ needs and goals is the most important part of providing advice to clients, and sometimes this means helping clients to see ways in which superannuation contributions (or withdrawals) can assist in meeting objectives that they may not realise are linked. Example: Businessperson with income outside superannuation Joe is aged 59 and earns $200,000 net business income each year. He also has $300,000 in a bank account generating 1% ($3,000) in interest each year. Joe is keen both to make his money work harder and to pay less tax. What strategies could he consider? If the full $300,000 was contributed to superannuation, there would be a reduced tax rate on its earnings. Tax inside superannuation would be 15%, so the $3,000 earnings would be taxed at 15% rather than 47%, resulting in a saving of $960 per year. Joe could invest the funds in a similar cash option within his superannuation fund. The disadvantage is that funds would be preserved within superannuation and cannot be withdrawn unless Joe meets a condition of release (such as reaching preservation age and retiring; reaching preservation age and beginning a transition to retirement (TTR) income stream while still working; or reaching age 65). At this stage, he could only access 10% of the balance under a TTR pension. TTR pensions continue to incur 15% tax on the fund’s earnings until Joe turns 65 or retires fully and the TTR becomes a retirement income stream account.

3.3 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Example: Retiree with shares and an unrealised capital gain Maria, a 61-year-old retiree, has a share portfolio valued at $357,500 providing her $16,000 of fully franked dividends, with an unrealised capital gain of $55,000. Can she contribute the shares to superannuation? Are there tax benefits in doing so? She could contribute the entire amount to superannuation in one year. The shares could be transferred as an ‘in - specie’ or off -market transfer (transferred to superannuation without selling). This can easily be achieved for clients with a self-managed superannuation fund, but many wrap accounts can also facilitate this transfer. Alternatively, the shares could be sold and the cash contributed. Either way the capital gain would be crystallised. As Maria has held these shares for over 12 months, her assessable income would be 50% of the realised gain or $27,500. The gain would be crystallised regardless of whether Maria contributed the funds to her superannuation account. In this situation, $27,500 could be contributed as a personal contribution to claim as a personal tax deduction and the other $330,000 would be treated as a non-concessional contribution (assuming she has no other available concessional cap space to use). The personal contribution would be claimed as a tax deduction and the resulting personal assessable income would be nil. The contributions tax would be 15% of $27,500, resulting in a tax bill of $4,125. This is the effective cost of the transfer. If the superannuation fund is then converted to a pension, all future earnings (dividends and realised capital gains) within the superannuation fund will be tax free. As she has retired, she could commence a commutable account-based pension. There will be no tax on the pension payments (as Maria is over the age of 60). If the shares are continued to be held outside of superannuation, the unrealised capital gain will continue to grow and will one day be taxed to Maria or her beneficiaries who inherit the unrealised capital gain. In addition, all the ongoing dividends are taxable in Maria’s personal name. It is up to the adviser to determine if the cost of transfer, in this case $4,125, is recouped by the current and future tax savings. The adviser will need to make some assumptions about future tax consequences. There are many clients with large non-superannuation portfolios, for which the adviser may need to design a long-term strategy that gradually transfers assets to superannuation. If the client intends to hold the shares long term, then any dip in the sharemarket may provide an opportunity to incur a reduced capital gain. There are many options available to clients, and often more than one strategy may work, so it becomes important to consider which is the best for the client, that is, which approach best aligns with their goals, needs, available resources, risk tolerance, timeframes and so on. When it comes to contributions strategies, an assessment of the following key factors is usually required: • Does the client have funds available? • Can the client make a contribution, and if so, what kind? • What limits apply to the contribution, including those resulting from previous contributions? • How will the client get money back out of superannuation to meet their goals and objectives? • Is there a tax benefit, and if so, is it worthwhile considering the restrictions placed on access? • What happens if the client dies prematurely?

3.4 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education 2 Case study 1: Career-starter contribution strategy The following is an example of a case study based on a young client and some contribution strategies that may be relevant for her. Case study: Jess Young It is 1 July 2023 and Jess Young is age 21, recently graduated from university and commencing a new full-time graduate position at WPT Pty Ltd. Jess is now being paid $64,500 per year plus SG at her new job. She has no other income and has never owned a property. Jess has a superannuation fund from her previous part-time employment, but has not made voluntary contributions in the past and has elected to keep the fund for her new job. She does not want advice on her fund. Jess has no real plans for retirement and in fact her main goal at present is to save for a deposit for a home. Her expectation is that this will take her at least five years. She has a high tolerance for risk. She has just received an inheritance from her great aunt of $9,000 and is wondering what option would work best for her. Jess believes she can commit $100 per week to a savings plan. You consider the following options: • Invest the $9,000 in a managed fund in her name and start a regular savings program of $100 a week in contributions to the fund. • Invest the $9,000 in her superannuation fund as a non-concessional contribution and start a regular savings program of $100 a week using salary sacrifice to contribute to the fund. Figure 1 Strategy options for Jess * FHSSS First Home Super Saver Scheme (ATO, 2022). Can Jess make contributions to superannuation? Yes, she is eligible to make concessional and non-concessional contributions up to the relevant caps as she has made no previous contributions. She could access bring-forward contributions if needed. She needs to make sure any concessional contributions do not exceed the caps by including her SG amounts in the calculations.

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3.5 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Why would you consider locking away savings into superannuation for a client wanting to save for their home? The main reason would be to take advantage of the First Home Super Saver Scheme (FHSSS), which allows wealth accumulation in the tax-sheltered environment of superannuation while allowing access to young clients as long as they use the money to buy their first home. Refer to ‘ Topic 2: Superannuation contributions ’ for a reminder of all the rules. It is worth noting that a maximum of $15,000 in eligible contributions in a single year can count towards the FHSSS and that there is a restriction on the amount of $50,000 that can be accessed. (ATO, 2022) Is the tax benefit worthwhile considering the restrictions placed on access? Making the following assumptions, we can compare the two options: • Both the managed fund and the superannuation fund have the same asset allocation and the same fund managers, and underlying investments. • Returns in the managed fund are assumed to be 6.5% after fees but before tax (of which 70% is income distributions and 30% is growth in the fund), and all distributions are assumed to be reinvested. • Returns in the superannuation fund are assumed to be 7.11% after fees and tax. • Jess has no deductions or offsets other than low income tax offset (LITO). • Returns are assumed to be credited weekly in line with contributions for simplicity of calculations. Table 1 After-tax position for no salary sacrifice vs salary sacrifice Item No salary sacrifice Salary sacrifice Salary $64,500 $64,500 Salary sacrifice $0 $5,200 Taxable income* $64,500 $59,300 Tax payable (including LITO and Medicare levy) $12,687 $10,815 After-tax income $51,813 $48,485 Income after tax and contributions to investment $46,613 $48,485 Net benefit Year 1 $1,872 * Not including tax on distributions from the fund. However, estimating that all distributions are taxed as income ($14,200 × 6.5% = $923), results in an additional $318 in tax from the end of year 1 based on a marginal tax rate (MTR) of 32.5% + Medicare of 2% (see below). Table 2 Investing in superannuation vs a managed fund Item Managed fund Superannuation Initial investment $9,000 $9,000 Contributions not including SG (net of tax) $5,200 $4,420 Investment returns 6.50% 7.11% Account balance end year 1 $14,973 $14,241 Net benefit before tax year 1 $732

3.6 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education The salary sacrifice has resulted in increased LITO and reduced tax for Jess (Table 1 above); however, she will have contributions tax payable on her salary sacrifice and this reduces the amount being invested (Table 2 above). After one year, and not including any tax she would have paid on distributions from her managed fund, her account balance is higher in the managed fund than in superannuation (Table 2 above). Based on the assumptions regarding distributions, if 70% is distributed as income and is not all franked, Jess would pay some additional income tax from this additional income which is credited to her for tax purposes even though she does not receive it. She may also be liable for capital gains tax (CGT) on any realised gains within the fund; however, they may come with a deduction where the gain is assessed as having been made on assets held for longer than 12 months. Ignoring the more complicated tax consequences that are highly dependent on the actual distributions from the fund, after a year, Jess has more disposable income and a lower investment balance with the salary sacrifice strategy. Overall, she is ahead using this strategy as the tax savings outweigh the reduced investment performance resulting from the 15% contributions tax. What about the tax when she needs to access the funds? Jess will pay tax when she takes money out of the superannuation fund under the FHSSS. The assessable component of the released amount will be taxed at her estimated MTR less a 30% tax offset. As Jess is in the 32.5% tax bracket, this means the assessable component of the withdrawal will effectively be subject to 2.5% tax plus Medicare of 2% (4.5%). The assessable components are the sum of her eligible concessional contributions plus the associated earnings on both concessional and non-concessional contributions. Given the set assumptions, after the end of the first year, this would be $6,005, and the tax 4.5% × $6,005 = $270 (Table 3 below). Jess’s withdrawal from her managed fund will also be subject to tax with 50% of capital gains from assets held for over 12 months being taxed at her marginal tax rate plus Medicare, and 100% of any gains of less than 12 months taxed at her MTR plus Medicare. At the end of one year, her capital gain could be estimated as 30% of her total returns: ($14,973 – $14,200) × 30% = $773 × 30% = $232. These would be then taxed at her MTR plus Medicare. The rest of the returns, $541, are assumed to be income and would also be taxed at her MTR plus Medicare in the tax year in which she was credited with the returns. For the first year, her total tax is then 32.5% + 2% Medicare on all returns = (32.5% + 2%) × $773 = $267 (Table 3 below).

3.7 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Table 3 Tax if funds withdrawn after one year in superannuation vs managed fund Super fund tax if cashed out under FHSSS after one year Amount Non-concessional contributions (initial investment) $9,000 Concessional contributions $4,420 Fund earnings* $805 Assessable amount = Concessional contributions + Earnings on all amounts $6,005 Jess MTR + Medicare 34.5% Tax of MTR + Medicare – 30% offset $270 Managed fund tax cashing out after one year Amount Total return (Account balance – Contributions) $773 Growth over 1st year $232 Income over 1st year $541 Tax including Medicare, assuming all growth is capital gains of <12 months $81 Tax including Medicare on income from fund $190 Total tax $267 * Associated earnings at the shortfall interest charge rate, estimated at 6% for this example. Fund earnings on eligible non-concessional contributions plus 85% of eligible concessional contributions. On the whole, it may be a strategy worth considering for Jess. Apply your knowledge 1: Pros and cons of career-starter contribution strategy 1. What are the benefits to Jess in undertaking the salary sacrifice and FHSSS strategy? 2. What are the risks, or constraints, in using superannuation to help Jess save for her home deposit? 3. Why doesn’t Jess get any government co-contribution even though she made a personal contribution to superannuation?

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3.8 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education 3 Case study 2: Wealth accumulator contribution strategy The following is an example of a case study based on a couple looking to increase their retirement savings and reduce their tax liabilities. Case study: The Medelålders It is 1 July 2023 and you are working with the Medelålders family: Lars and his wife Amanda. Lars is 41 years old and Amanda is 35 years old. Amanda has just returned to part-time work, after five years as a stay-at-home parent. Lars earns $130,000 a year and Amanda earns $45,000 a year. They have a home worth $1,800,000 and a mortgage of $450,000, with a redraw facility. Their cash flow position is shown in Table 4 below. Table 4 Amanda and Lars ’s income and expenses Item Lars Amanda Combined Salary $130,000 $45,000 $175,000 Salary sacrifice/deductible contributions to super $0 $0 $0 Allowable deductions $1,750 $600 $2,350 Taxable income $128,250 $44,400 $172,650 Tax payable (including LITO and Medicare) $35,085 $5,511 $40,596 After-tax income $94,915 $39,489 $134,404 Mortgage (min repayment 30-year loan @ 5% p.a.) $29,000 Other expenses $80,000 Net income after tax and expenses $25,404 Lars ’s current superannuation balance is $121,100 and Amanda’s is $42,240. Lars has just inherited a share portfolio from his father that he is about to sell and wants to use as much the proceeds as possible to reduce his mortgage. Table 5 Lars share portfolio inheritance Lars ’s inheritance Amount Market value $250,000 Cost base $120,000 Assessable gain $65,000 Their primary wealth accumulation goals in order of priority are: • clearing their mortgage so they can start saving • reducing tax, particularly due to the inheritance • optimising retirement savings to make their positions more equitable.

3.9 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education You consider the following options: • direct proceeds of sale less tax to their mortgage account • reduce tax on sale by making concessional contribution to Lars’ s superannuation from sale proceeds using carried-forward concessional caps • super contribution splitting of Lars’ s SG and concessional contributions to help increase Amanda’s superannuation account balance • salary sacrifice (or concessional contributions at the end of the year) to assist in reducing tax for Amanda or Lars using carried-forward concessional caps. Figure 2 Strategy options for Lars and Amanda Can Lars and Amanda make contributions to superannuation? Yes, they are eligible to make concessional and non-concessional contributions up to the relevant caps. As they have made no previous personal contributions, they could access bring-forward non-concessional contributions and carry-forward concessional contributions if needed. If they make extra concessional contributions, they need to make sure any concessional contributions do not exceed the caps due to the SG amounts already being made (see Table 6 below). Either of them can split SG or personal contributions with the other. Lars or Amanda could make a spouse contribution, but as neither of them earns below $40,000, there is no tax advantage for them to do this. It would help to even up their account balances but nothing else.

3.10 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Table 6 Concessional contributions caps Year Concessional cap Lars cap used Lars cap remaining Amanda cap used Amanda cap remaining 2023/24 $27,500 $14,300 $13,200 $4,950 $22,550 2022/23 $27,500 $13,650 $13,850 $0 $27,500 2021/22 $27,500 $13,000 $14,500 $0 $27,500 2020/21 $25,000 $12,350 $12,650 $0 $25,000 2019/20 $25,000 $12,350 $12,650 $0 $25,000 Total unused concessional cap $66,850 $127,550 Why would you consider locking away savings into superannuation for clients in their 30s and 40s? In this case, additional concessional contributions to superannuation can be considered to reduce the one-off tax liability from the capital gains made on the sale of the inherited portfolio. Concessional contributions could offset the tax liability for Lars from the sale of the portfolio if the available caps allow it.(see analysis in Tables 7 and 8 below). A second reason would be to reduce the usual income tax burden. This could be done by taking advantage of the offset account or redraw facility to store surplus income (hence lowering their mortgage interest over the year and not adding any taxable income to their accounts) and then making a concessional contribution at the end of the year. Alternatively, if Lars ’ s SG contribution and the salary sacrifice/personal deductible contribution to reduce the one-off tax are split to Amanda after contribution, to help even up the superannuation for Amanda. This needs to be weighed up against the benefit of leaving more money in the mortgage account and reducing the time to clear their loan and the total interest payable on the loan, as well as limits based on available cap space and required disposable income. Is the tax benefit worthwhile considering the restrictions placed on access? Adding additional contributions to superannuation that are not designed to reduce a one-off tax burden may not be worthwhile at this stage of the clients’ li ves due to access and opportunity cost. Although returns in superannuation should outweigh the costs of loans on homes, this is not a guarantee and it is often more desirable for families to retain access to funds and to pay loans down as fast as possible while interest rates are not too high, and in particular as rates are expected to increase. Therefore, in this case study, taking this into account a nd the clients’ goals, adding extra money to the superannuation as a non-concessional contribution has been ruled out. The main choices are whether to let Amanda make the contribution of the sale proceeds directly to her account or to have Lars make the contribution to his account and then split the benefits to her. These choices are in part dictated by their available concessional contributions caps (Table 6 above) and in part by the fact that Amanda has a low income and salary sacrificing/personal concessional contributions will not be as beneficial to the family for that reason. The most sensible choice is for Lars to make a contribution from the offset or redraw account just before the end of the financial year and claim this as a tax deduction. He can then use funds from the sale of portfolio to cover any income shortfall the family has and still reduce his mortgage.

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3.11 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Table 7 Portfolio capital gain with and without personal deductible contributions Lars makes personal deductible contributions Item Lars Amanda Combined Salary $130,000 $45,000 $175,000 Assessable capital gain $65,000 $0 $65,000 Deductible contributions to super $66,850 $0 $66,850 Allowable deductions $1,750 $600 $2,350 Taxable income $126,400 $44,400 $170,800 Tax payable (including LITO and Medicare) $34,363 $5,511 $39,874 After-tax income (salary minus tax payable) $95,637 $39,489 $135,126 Mortgage (min repayment 30-year loan @ 5% p.a.) $29,000 Other expenses $80,000 Net income after tax and expenses $26,126 No personal deductible contributions Item Lars Amanda Combined Salary $130,000 $45,000 $175,000 Deductible contributions to super $0 $0 $0 Assessable gain $65,000 $0 $65,000 Allowable deductions $1,750 $600 $2,350 Taxable income $193,250 $44,400 $237,650 Tax payable (including LITO and Medicare) $61,495 $5,511 $67,006 After-tax income (salary minus tax payable) $68,505 $39,489 $107,994 Mortgage (min repayment 30-year loan @ 5% p.a.) $29,000 Other expenses $80,000 *Net income after tax and expenses – $1,006 * Cash flow shortfall to be met by net proceeds from realised capital gain following sale of share portfolio. Table 8 Superannuation balances after superannuation contribution splitting and SG Superannuation balance Lars Amanda Combined Superannuation balance before $121,100 $42,240 $163,340 SG contributions @ 11% $14,300 $4,950 $19,250 Deductible concessional contributions $66,850 $0 $66,850 Contributions tax – $12,172 – $742 – $12,914 Super balance after $190,078 $46,448 $236,526 The personal deductible contribution has resulted in an investment amount of $26,126. The investment amount remaining in the mortgage redraw will mean that their mortgage payments will be more efficient, reducing the amount if interest they pay and increasing their principal repayment shortening the length of their loan.

3.12 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Apply your knowledge 2: Pros and cons of wealth accumulator contribution strategy 1. What would the situation have been if Lars had simply paid the tax on the portfolio liquidation and not made any contributions to superannuation? 2. Why in this example is it better to use the contributions splitting strategy rather than have Amanda make the contribution to her own account? 3. What alternatives could you think of if Lars did not have adequate cap space to make the personal concessional contributions to his superannuation? 4 Case study 3: Pre-retirement contribution strategy In this case study, a retired widow is looking at strategies that may help grow retirement savings and reduce tax. Case study: Victor Yang It is 1 July 2023, and you are assisting Victor Yang, aged 66, whose wife Jennie passed away unexpectedly. Victor owns a very successful business that he was planning to sell to enable him to fully retire. The business is owned under a company structure. However, since Jenn ie’s death, Victor is the sole shareholder and has been a significant individual for at least 15 years. The business is a small business (turnover is less than $2 million or the net value of the assets is less than $6 million). Victor owns a large home, with no mortgage. He and Jennie had lots of plans for their upcoming retirement, but since she passed away, things are completely different and he cannot stand being in their home alone and wants to sell up and move into an apartment with a view, closer to his son and daughter-in-law. Victor has a small superannuation fund, with contributions from compulsory SG payments he received as an employee of his company. Most of the time, Victor received income in the form of dividends rather than salary. So he realises he needs to do something to generate a decent income in retirement. Table 9 Victor ’s relevant assets Item Market value Cost base Capital gain House: debt free $3,300,000 $840,000 $2,460,000 Business valuation $1,900,000 $400,000 $1,500,000 Superannuation $200,000 $150,000 $50,000 Table 10 Victor ’s new home purchase Item Cost New apartment $1,290,000 Stamp duty on purchase (Victoria) $74,000 Agents ’ fees and costs of sale $99,000 Total $1,463,000 Net amount remaining after sale and new purchase $1,837,000

3.13 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Victor’s primary goals in order of priority are: • selling his house and buying a smaller property • selling his business • optimising his retirement account balance to improve his tax position • maybe access some age pension or other government concessions or benefits. At this stage we are simply looking at contributions strategies, so consider the following: • direct proceeds of the sale of the house to superannuation • reduce tax on the sale of the business by making contributions to superannuation using small business concessions. Figure 3 Strategy options for Victor Can Victor make contributions to superannuation? Yes, he has unused concessional contributions within the current annual cap and under rollover provisions. He has not made any non-concessional contributions in the past and has bring-forward amounts available. As the sole owner of a company in which he was the main person responsible for its operation and success, he is also eligible for small business CGT concessions, including the small business 15-year exemption and the small business retirement exemption. We will look at the business first. As per Figure 3 above, the order in which contributions are assessed is under the best rule first, the 15-year exemption; if that is unavailable, Victor could access the retirement exemption, and any further benefits could be contributed using non-concessional caps. Victor has a capital gain of $1.5 million from the sale of the business at $1.9 million. His lifetime cap amount under the 15-year retirement exemption of $1.705 million (FY 2023/24). After seeking advice from Victor’s accountant, you confirm he qualifies for this exemption and that Victor can contribute the proceeds of the sale under this exemption. Although the actual gain is only $1.5 million, he can contribute the proceeds of sale up to the CGT cap as he has not used this concession before. Neither the 15-year or retirement exemption are subject to contributions tax. Any remaining amounts could be contributed as non-concessional contributions.

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3.14 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education From here, we can look at the sale of his home. Two caps could be used here: the downsizer contribution and non-concessional contributions caps. After selling the property and paying stamp duty and other costs to buy his new apartment, Victor is left with $1,837,000, some of which he may be able to contribute to superannuation. Table 11 below shows the amounts contributed under the two available caps. Victor will have about $1,402,000 remaining after these contributions. Table 11 Contributions to Victor’s superannuation Sale of business Contributions Cap assessed against Cap remaining Amount remaining Business sale: 15-year exemption $1,705,000 $1,705,000 $0 $195,000 Business sale: non-concessional contributions $195,000 $330,000 $135,000 $0 Sale of house Contributions Cap assessed against Cap remaining Amount remaining Downsizer contribution $300,000 $300,000 $0 $1,537,000 Non-concessional contribution $135,000 $135,000* $0 $1,402,000 * Amount remaining after bring-forward trigger as a result of excess proceeds from sale of small business. The resultant superannuation account balance is shown in Table 12 below. Table 12 Superannuation balances after superannuation contribution Item Amounts Superannuation opening balance $200,000 Business sale: 15-year exemption $1,705,000 Downsizer contribution $300,000 Non-concessional contribution $330,000 Total account balance after any tax $2,535,000 Why would you consider contributions into superannuation for a client who is already past their preservation age? The biggest risk to this strategy is the premature death of Victor as he has only adult non-dependent children who would pay tax on any taxable component within his fund. This could be worse than if the funds were held in his own name, however the predominant superannuation components in this example will be tax free. The other consideration with the strategy is the impact on the age pension as the principal residence is not counted in the assets test, whereas the superannuation account balance is. This should be weighed up by looking at his entire situation, his goals and objectives.

3.15 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Is the tax benefit worthwhile? Taxation in accumulation phase is capped at 15%, whereas tax on income outside superannuation would be taxed at Victor’s MTR. One benefit of this strategy is that all contributions made have no contributions tax applied as they are not concessional contributions. The tax exemption on the sale of the business applies whether or not Victor contributes the amount to superannuation, so there is no immediate tax benefit from putting the money into superannuation. However, over the longer term, capital gains from the investment of those proceeds will be taxed at 10% in the superannuation fund if realised after 12 months, and 15% if not. This is likely to be lower than if the gains were taxed in his own hands, with a 50% discount applying and tax at his MTR. However, this is not certain and would depend on timings. Capital gains from the sale of a principal residence are also exempt from tax, but once the surplus funds are reinvested, normal CGT rules apply, and again most likely the tax would be lower in superannuation. Furthermore, once Victor commences a retirement income stream, there will be no tax on the returns generated on assets supporting the income stream. Although Victor will not have an income once he sells the business, the remaining assets valued at $1,402,000, could be used to support him until he starts a retirement income stream. So he may in fact have a lower tax rate in the short term, but for the longer-term benefits, the strategy is considered worthwhile. Other considerations While the focus here has been on getting funds into superannuation through contributions strategies, it is always important to give some consideration to how the benefit may ultimately be accessed. This includes considerations of using income streams and the transfer balance. These issues will be explored in detail in later topics. Apply your knowledge 3: Pros and cons of pre-retirement contribution strategy 1. Assume Victor already had a large superannuation account balance, say over $1.68 million at the end of last financial year, instead of his low balance. Would this strategy still work? 2. Would Victor have been able to make the downsizer contribution if he sold the business in this financial year, retired and then sold the house next financial year? 3. Assume Victor does not need to convert his superannuation to an account-based pension. Can Victor make another non-concessional contribution in the next financial year? Would you recommend that he do so?

3.16 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Summary This topic has covered some of the key situations clients are presented with and some strategies that could be used to help them achieve their goals using contributions to superannuation. It considered the pros and cons of various options and the importance of considering clients’ needs an d goals, then helping clients to see ways that superannuation contributions can assist in meeting objectives that they may not realise are linked. There are many options available to clients, and often more than one strategy may work and it becomes important to consider which is the best for the client, that is, which best aligns with their goals, needs, available resources, risk tolerance, timeframes, and so on. Suggested answers Apply your knowledge 1: Pros and cons of career-starter contribution strategy 1. Benefits to Jess are a net tax benefit from the strategy compared to the investment outside superannuation. There is also the benefit that a salary sacrifice to superannuation strategy restricts access to funds unless they are used for the purpose of buying a home. Regular savings plans provide discipline and have the benefit of dollar cost averaging. 2. The risks are that if Jess needs access to funds for any emergency or other purpose, she will have difficulty accessing the money. There are always risks associated with investing into growth assets and market timing: if the returns are not as predicted, then funds may not have accumulated as fast as predicted and she may have difficulty meeting her goals. Jess’ s timeframe of five years is just adequate for a growth investment portfolio and the risk of investing into more conservative investments is that her savings will not keep pace with the rate of growth in housing markets. Constraints with the use of salary sacrifice are that limits apply to concessional contributions, although she is currently well within the limits. A further constraint is the maximum that can be counted towards the FHSSS for release purposes is $15,000 in total contributions in a financial year. Given her age it would be unwise to recommend a strategy like this where the amount exceed this limit in any financial year. Also SG cannot be counted towards the FHSSS amount. 3. Jess’ s assessable income (plus any fringe benefits and total reportable employer superannuation contributions) of $64,500 is above the threshold of $58,445 (FY 2023/24) and hence she is not eligible for the co-contribution.

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3.17 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Apply your knowledge 2: Pros and cons of wealth accumulator contribution strategy 1. The answers below are not exhaustive. If Lars had simply paid the tax on the capital gain from the portfolio, he would have been liable for more in total tax, than the tax he paid without the capital gain. In this case, the portfolio value after paying the tax bill, would reduce unless Lars met the tax expense from his disposable income. This is slightly more than he would have had to use had he made the salary sacrifice (Table 7 above ). However, the main impact would be that Amanda’s superannuation account balance would still be significantly below Lars’ s balance. 2. The tax savings are much better if Lars makes the concessional contribution as he is on the higher MTR, and the portfolio is in his name, and hence the capital gain should be taxed as part of his income not Amanda’s , pushing him into a higher tax bracket. The splitting strategy also allows the SG con tribution from Lars’ s employer to be given to Amanda, further increasing her account balance. It is also relevant to note that the splitting does not impact Amanda’s caps, so if there was more disposable income, she could make further tax-deductible contributions to superannuation at the same time as this strategy was being undertaken. 3. One option would be to contribute as much as possible to Lars’ s superannuation, and then make a concessional contribution for Amanda, within her caps, but no further than the point where her income reduces to the tax-free income level ($18,200 not including LITO). Contributions beyond that level would be of limited benefit as funds are no longer accessible, and there is no tax saved, merely a tax liability (15% contributions tax applies to the contributions). Another option would be to make a non- concessional contribution to Amanda’s or Lars’ s superannuation funds to take advantage of the cap space available. This would result in increased tax-free components in the relevant superannuation account which may be of use later in retirement. Apply your knowledge 3: Pros and cons of pre-retirement contribution strategy 1. As at 30 June of the previous financial year, if he had a total superannuation balance over $1.68 million but less than $1.79 million, he could only make $220,000 of non-concessional bring-forward contributions; if had over $1.79 million but less than $1.9 million, he could make $110,000 in non-concessional contributions only; and if above $1.9 million, his non-concessional contribution cap would be nil. The small business and downsizer contributions don’t have a total super balance eligibility criterion, but the non-concessional contributions would need to be reduced. 2. With regard to the downsizer contribution rules, this would make no difference as downsizer contributions can be made at any age regardless of work status and regardless of total superannuation balance. 3. No he cannot, as Victor’s total superannuation balance will be over $2.7 million by the end of this financial year, and hence he would not be able to make any non-concessional contributions going forward (unless his total superannuation balance reduced considerably). Hence this is not something you would recommend.

3.18 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T3_v14 © Kaplan Higher Education Reference list Australian Taxation Office (ATO) 2022, First home super saver scheme, Australian Government, 16 November, viewed 6 July 2023, < https://www.ato.gov.au/individuals/super/withdrawing-and- using-your-super/first-home-super-saver-scheme >.

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