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25. Indirect Gearing of Non-concessional Contributions

Older clients, particularly those over or close to age 50, and wealthier clients deriving higher than normal taxable income, may choose to use a similar strategy that pays non-concessional (ie non-deductible) superannuation contributions to a SMSF on a regular basis.

The problem here is that there is no deduction for interest incurred on amounts borrowed to pay non-concessional contributions. The solution therefore is to not borrow to pay them, and to take care to only use debt free cash flow to pay non-concessional contributions. This means, if necessary, the practitioner should deliberately borrow to pay costs where the ATO accepts that interest is deductible, in order to free up cash flow to pay the non-concessional contributions.

The transfer of the future income stream on the investment of the non-concessional contributions is the economic equivalent of large concessional (ie deductible) contributions over and above the $25,000 per member per year limit ($50,000 if over age 50, until 2012).

[DIAGRAM TO GO HERE]

The idea is shown in the above diagram. The red lines show borrowings and payments using debt, and the green lines show practice cash flow and payments not using debt.

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