Borrowing to Contribute has Some Merit
The dramatic reduction in the superannuation non-concessional contributions caps to be introduced on 1 July has given some merit to the strategy where an individual puts borrowed money into their retirement savings vehicle, a senior accounting executive has said.
“One of the questions I often get asked is: ‘Should I borrow to make non-concessional contributions because it’s really my last opportunity to make a significant contribution?’ The upshot is you’ve got to know the interest on a loan like this will not be deductible, but if you had a client who had some cash-flow issues and knew they were going to come into some money in the new financial year, then maybe it’s worth it,” PricewaterhouseCoopers director Liz Westover told an information session hosted by Class at the recent Accounting Business Expo in Sydney. “Maybe it’s worth borrowing knowing your client is going to be able to repay that loan shortly thereafter. “So there would be scenarios where people might actually need to borrow [to make contributions].” In regard to immediate action in response to the super reforms, Westover suggested accountants needed to identify those clients who had a superannuation balance of between $1.4 million and $1.6 million and then recognise the action that was required. In addition, she emphasised the importance of knowing the tests still in place under the legislation. “Make sure you look at all the tests and the various applications of the age test and the work test,” she said. “And the big ticket item here is to make sure you ask them what are the non-concessional contributions that have gone in for them in the last couple of years that might have already triggered the bring-forward provisions. “There’s no point talking to clients and say put in $540,000 if in fact you’re causing them to breach the contributions caps.” She pointed out probing questions might be needed during this process to determine fully the amount a client had actually contributed toward their super fund.