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Maintaining tax efficiency through giving

Ben Clark

SMSF trustees wanting to retain some of the concessional tax treatment once enjoyed in the superannuation sector can possibly look to philanthropy for the solution, writes Ben Clark.

The 2016 federal budget announced a raft of changes that reduce the options available for individuals to maximise their accumulated super benefits, previously designed to fund retirement and to ease the burden on the age pension system.

The mechanics of these changes, which take effect from 1 July 2017, limit the amount of annual concessional super contributions a person can claim as a tax deduction. They also reduce the non-concessional super contribution amount to $100,000 a year, with the ability to contribute up to $300,000 in any one year through the three-year bring-forward rule.

In addition, there are further restrictions, such as the inability for people with more than $1.6 million in super to make any further non-concessional contributions.

How will the changes impact on high net worth individuals with large super balances?

The impact on Australians who are accumulating wealth will be significant, particularly for those who experience a windfall gain on the sale of an asset such as property. Where the proceeds would have previously been contributed to super, this option may no longer be available.

As a result, investment returns would then be included as personal income and be taxed at their prevailing marginal tax rate rather than at the concessional rate available through super. For high net worth individuals this represents a significant reduction in tax concessions.

Where clients realise a substantial ‘one-off’ taxable gain, it may be worth raising philanthropy as an effective option to reduce tax. This can be done through discussing the merits of establishing a structured charitable giving program, such as through a private ancillary fund (PAF) or a donor-advised account under a public ancillary fund (PuAF).

A philanthropic alternative – support your foundation, not the ATO
In this way, ‘structured’ giving can be an attractive option for clients who are looking to make an initial irrevocable donation of as little as $50,000. This is because the value of the donation can be offset against taxable income in the financial year the donation is made or apportioned over a five-year period (including the financial year the donation is made).

Once the PAF or donor-advised account is established, the donor is required to distribute a small percentage of the value of their PAF or donor-advised account to charity (5 per cent a year for a PAF or 4 per cent for a donor-advised account) to eligible charitable entities.

In contrast to making one-off donations to charities, PAFs and PuAFs enable donors to create their own personalised giving program, be more effective and focused in their philanthropy, build a legacy and engage with others in the power of giving.

What philanthropic structure is best for your client?

There are many options to explore when establishing a philanthropic structure for a client. As an adviser, it is important you initially provide clients with a range of options as the motivation behind an individual’s decision to structure their giving may not be immediately apparent.

When providing advice on structured giving, you should consider the following questions:

  • Does the client understand their donation is irrevocable?
  • Does the client wish to receive a tax deduction for their donation? If so, do they require it in the current financial year?
  • What amount does the client wish to contribute to commence their structured giving program?
  • What level of control or involvement does the client require in running or managing the charitable trust?
  • Does the client understand that by giving through an ancillary fund they can only support charities endorsed as an item 1 deductible gift recipient?

The answers to these questions will guide your recommendation as to the most suitable philanthropic structure for your client.

Typically, these include a private ancillary fund, a donor-adviser account or a testamentary charitable trust (see table).

When looking for assistance in providing philanthropic services to your clients, advisers should look for a trusted provider that works in partnership with you and provides access to a broad range of specialist services.

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