Taxpayers get attracted to strategies that help them to reduce tax and ideas which help them to increase retirement income. One such strategy is negative gearing, where the taxpayer makes a revenue loss in hope of future capital gain and this strategy has been stretched to "Super Gearing" where the taxpayer sets up a self-managed Super fund (SMSF) and then the SMSF borrows under Limited Recourse Borrowing Arrangement and purchases a loss making capital growth asset. 
An added benefit of super gearing is at the time of selling the underlying asset, if members are in pension phase (over the preservation age), any capital gain resulting from the sale will not be subject to any capital gain tax as under current legislation, assets supporting a pension are not subject to any tax. Another advantage of super gearing is that the loss in the SMSF creates a tax shelter for tax to be paid on concessional (deductible) contributions. For example by owning a residential property, with borrowing, if the SMSF makes a tax loss (due to high interest rate over rental income and claims for holding costs such as depreciation) of say $15,000, any contributions for a member, where the contributor has claimed a deduction on the contribution (known as concessional contribution) up to $15,000 will not liable to any tax within the SMSF. These benefits can attract taxpayers with high income to combine salary sacrifice strategy with super gearing strategy for property, to give a better result instead of negative gearing for property outside super. Which also means if you have high rental revenue loss in your SMSF, you may be able to contribute more concessional contribution without paying any tax. However, there is a limit on how much concessional contributions can be made to super.
Click here to learn how your SMSF can borrow
What is Excess Concessional Contribution (ECC) If you are self-employed, you can claim a tax deduction for super contributions and if you are employed, you can sacrifice a part or whole of your salary for superannuation contributions. Super contributions are taxed at a concession, for financial year 2014 - 15, every dollar which is contributed is taxed at only @ 15% as compared to 19% tax plus 2% Medicare Levy on any income above $18,200 outside super. 
However, if you are a high income earner and earn (adjusted income) more than $300,000, contributions can be taxed at a higher rate under Div 293 of ITAA. For the 2014 - 15 year, the concessional cap amount is $30,000, however, if you are 49 years or older on 30th June 2014, the concessional cap amount is $35,000. If more than concessional cap amount is contributed for you in your superannuation fund and claimed as a tax deduction by the contributor, the excess amount above the cap amount is called Excess Concessional Contributions (ECC). What is the significance of ECC? ECC are taxed under a new regime (Tax Laws amendment (Fairer taxation of Excess concessional contributions) Act 2013) at individual level, which has the effect of taxing such contributions at the taxpayer's marginal tax rate, instead of at the top marginal tax rate, that is, it gives the effect as if no excess contributions were ever made for the member. ECC is forcefully added to the taxable income of the taxpayer under Division 291 of ITAA. For example Sam is 42 years old and is on total salary package of $100,000 for the 2014 - 2015 year. He requests his employer to contribute $45,000 to his Self-Managed Super Fund (SMSF) from his total package. His employer claims the full $45,000 contributed as a tax deduction. Of the $45,000 contributed to super, $30,000 will be considered as concessional contribution and the remainder $15,000 will be categorized as ECC. Since Sam's taxable income is $55,000 after his super concessional contribution and salary sacrifice, the new legislation forcefully includes the ECC amount to Sam's taxable income by ATO by amending Sam's income tax return to $70,000 which is then taxed at his marginal tax rate. When $15,000 is added to Sam's taxable income, it will result in tax payable at individual level, but a credit of 15% tax offset is allowed since the super fund which received this contribution would have already paid 15% tax on this contribution. Further, the legislation also allows withdrawal of up to 85% of the ECC amount from the super fund to help the taxpayer to pay any tax on amended assessment. In our example, Sam can withdraw $12,750 ($15,000 contribution less 15% tax) which will help him to pay additional tax on the amended assessment
Click here to learn how to set up a SMSF
How does the amendment process work?  The effect of the change in legislation is that, it brings the taxpayer back to the original position at individual level, as if, there are no ECC. In our example, when $45,000 is contributed in the SMSF, the whole amount is included as income of the fund and the fund is subject to 15% tax, which is either paid under installments method or when the SMSF lodges its income tax return. If there is a tax loss, please note that no tax on contribution will be paid. At the individual level, Sam will lodge an income tax return and declare $55,000 as taxable income. After the SMSF lodges its annual return, the ATO will come to know that ECC exists for Sam and will issue an amended assessment for Sam, increasing the taxable amount by $15,000 to $70,000. Sam will receive an amended assessment for tax payable on $70,000 with a tax offset of 15% on $15,000 which is the tax paid by the SMSF and the balance of tax will be payable along with 2% Medicare Levy. Sam will also be subject to excess concessional contribution charge from 1st July 2014, on the balance payable amount on the amended assessment, negating any interest advantage of being able to contribute into super instead of Pay as you go withholding tax, where he would have received $15,000 as salary in his hands and paid PAYG tax instead of paying tax at the time of amended assessment due to ECC, this charge is levied under Division 95 of the ITAA. When ATO issues amended assessment, it will also issue an optional withdrawal or a release authority to the superannuation provider as per Division 96 of ITAA. Sam will be able to withdraw 85% of the ECC amount of $15,000. Sam will have the option to pay the remainder tax on the extra $15,000 included in his taxable income from his other resources or Sam may be allowed to withdraw some or all of the 85% of $15,000 from super and then pay the tax.
How is contribution treated by the SMSF? If Sam does not withdraw any ECC amount, the super fund will consider the whole amount of $12,750 ($15,000 less 15% tax) as concessional contribution (taxable component of his superannuation interest - see Section 307-200 of ITAA). Released or withdrawn excess concessional contributions (ECC) are not included in Sam's non-concessional contributions cap amount see subsection 292-90(1A) of ITAA.  Any ECC amount left in the fund is treated as concessional contribution and tested to the yearly non-concessional contribution cap amount. If ECC exceed non-concessional contribution cap during the income year, the member can pay up to 95% tax on the excess amount. Note that non-concessional cap amount for the 2014-15 year is $180,000 and those taxpayers who are under 65 can bring forward the next two years non-concessional contribution cap amount to the current year, thereby extending the cap amount for any particular year to $540,000. Any amount contributed above the non-concessional cap amount can trigger the bring-forward rule. For example if a concessional contribution of $250,000 is made by a 40 year old self employed taxpayer, the first $30,000 will be considered as concessional contribution, since the remainder $220,000 is $40,000 above the non-concessional cap amount of $180,000, this contribution will trigger the bring forward rule since the ECC amount is over and above the non-concessional contribution cap amount of $180,000. Strategies and tax planning opportunities under new law Existing strategies may need to be tweaked to adopt to the new legislation. Please note our standard disclaimer applies on how the below strategies work as all of them include some sort of financial advice. Please do not attempt to implement them without any professional help. Some of the below strategies may require you to update your SMSF trust deed.
Click here to learn how to update your SMSF trust deed
1. Benefit of Super Gearing Under the new legislation, 15% tax offset is still available to taxpayers, irrespective to the fact that the super fund may not have paid 15% tax on the concessional contributed amount. Assuming that there is a revenue loss in a SMSF it is possible that the whole or part of the ECC amount is not subject to tax on contribution. For example, it is possible that a SMSF has borrowed money under Section 67A & 87B of the SIS Act to purchase a residential property and the interest rate and other holding costs, including depreciation are higher than rental income. For example, say the net revenue loss is $10,000 and the taxpayer contributes $45,000 of which $30,000 is concessional contribution and $15,000 is ECC. Ignoring tax on $30,000 concessional contribution, the revenue loss will reduce tax on $15,000 ECC amount to only 15% tax on $5,000 ($750), however when the ECC of $15,000 is included in taxable income of the taxpayer on the amended assessment, the ATO will allow the full 15% tax offset on the whole of ECC amount of $15,000 (Tax offset will be $2,250). This means that although only $750 is paid by the SMSF, however $2,250 tax offset will be credited to the taxpayer on his amended assessment. Hence, taxpayers on high marginal tax rate with a revenue loss in their SMSF will benefit due to higher tax offset.
Click here to learn how you can lend to your SMSF
2. Benefit of franking credits within the fund.  If an SMSF invests in Australian shares which pay fully franked dividends @ 30%. Like above, imputation credit on dividend received, creates a tax shelter for tax on contributions. This benefits magnifies when a taxpayer is on pension phase and the whole of the 30% credit is used to reduce tax on concessional contributions. For example, if a taxpayer is on pension phase and the fund receives fully franked dividends, franking credit on these dividends will not only help reduce tax on concessional contribution but also tax on ECC. Continuing with our above example of Sam, who is 57 years old and has $600,000 on 1st July 2014 in pension phase under transition to retirement rules and the full amount is invested in Australian Shares which pay his SMSF dividends @ 6% including franking credits. The fund will receive $36,000 income of which $10,800 will be franking credit. When $45,000 is contributed to the fund (ECC is $10,000 since the concessional cap amount is $35,000) it will create a new accumulation account and will be subject to 15% tax or $6,750, however $10,800 franking credit will help to reduce this tax plus any tax on dividend income of $36,000 which is pertaining to the accumulation account as assets supporting a pension are not subject to any tax. Since the fund has $600,000 in pension phase and $45,000 of new contribution will be used to start a new accumulation account for Sam as per SIS Reg 1.06 (9A) no new funds can be added to an existing pension account. If the assets of the accumulation account are not segregated from assets of pension account, Sam's SMSF will need an actuarial certificate to determine how much of the income of the fund is subject to tax.  Since $600,000 are in pension phase and only $45,000 is in accumulation account (assuming a single member fund) which were contributed during the year, most of the $36,000 dividend income will be exempt from tax. The percentage of the dividend income of $36,000 which will be tax free will depend on which date the $45,000 contributed to the fund (weight of accumulation account Vs weight of pension account) and on which date and how much pension withdrawals are made from the fund as per Section 295 - 390 of ITAA. This % is determined by an actuary, you can obtain an actuarial certificate from our website for $97.50, to learn more click here. However what is interesting is that ECC amount of $10,000 will not pay any tax on contribution due to the tax shelter created by franking credits. However at the time of the amended assessment when the ECC amount is included in Sam's taxable income the amended assessment will also allow 15% tax offset of $1,500 to the taxpayer to reduce his ultimate tax liability. Hence, funds which have high franking credits will benefit members, who should salary sacrifice above the concessional cap amount. Please note that this offset is lost when the extra franking amount is refunded to the fund due to lower concessional contributions.
3. Immediate conversion of ECC to pension phase If you are over the preservation age, any excess concessional contribution amount can move to pension phase on the day the contribution is made to the fund and the fund can start earning exempt current pension income on the contributed amount. And if you are under 60 years and on transition to pension phase, you can withdraw the entire ECC amount, which is considered as concessional contribution or taxable component in the fund and contribute it back as non-concessional contribution to increase your tax free component in the fund and commence a tax free income stream. Please note that any pension payment from a tax free component is not included in taxable income of the taxpayer. However, if you are under 60 years old and still working and have not retired (working over 10 hours per week), you are limited to withdraw 10% of the pension account as on 1st July of the year under the transition to retirement rules.
Click here to learn how to commence a pension
4. Business owner opportunity: Build your super without paying any further tax - New Strategy - How to more than double your contribution without paying a cent more in tax.  This strategy is for those business owners who operate via a company structure and their companies have paid tax in previous years on income and have credits in their franking accounts.
This strategy can be used to build your super, in fact double the cap amount without paying any extra tax and by unlocking franking credits in their companies franking account. Warning: Please note that if you do not have franking credits in your company, this strategy does not apply to you. Example: To understand this strategy, let's look at an example. Brett and his wife Gina are both 50 years old and run a successful business and operate via a company structure. Over the last three years $2M profits have been declared and the company has paid $600,000 in tax at the company tax rate of 30%. Brett and his wife Gina have paid off their own home and although run a successful business, they live frugally and pay themselves salaries of about $100,000 each from the company. However, they contribute maximum concessional cap amount to their SMSF as they want to sell the business and retire within 10 years. Click here to learn how to set up a Pty Ltd Company Strategy: The Strategy is unveiled in 6 steps and is for 2014 - 2015 financial year Instead of getting paid a salary from the business of $100,000 each (Cash $73,000 after about $23,000 tax each or $146,000 for both), Brett & Gina should consider receiving dividends from their company to contribute into super and live on withdrawal of ECC amount for the next 10 years till they retire. The company also contributes concessional contribution of $35,000 each for Brett and Gina to their self-managed super fund. To maximize benefit of unlocking franking credits of their company, Brett and his wife can get a dividend of $215,000 each (with franking credit of $64,500) and the remainder in cash of and contribute $196,800 as a deductible contribution to their SMSF. $196,800 will include $35,000 concessional contribution and the balance will be $161,800 excess concessional contribution. The ECC amount is tested to the non-concessional cap, since the amount is less than $180,000, bring-forward rule will not be triggered. After the deductible contribution, will leave taxable income of $18,200 which will not be subject to any tax and the whole of the franking account will be refunded when the tax return is lodged. Timing of events is "The key" to run this strategy successfully as the strategy unfolds itself in below 6 steps.
Step 1: Pay Dividends instead of salary 
Dividends can be paid during the year to Brett's family, however the contribution to super should be made closer to 30th June 2015. Dividend of $215,000 has to be paid to both which comes with a franking credit of $64,500 and cash of $150,500. Dividend can also be paid on 1st July 2014 or on a monthly basis for daily expenses. The concessional contribution amount is $196,800 each which means that closer to 30th June 2015 there will be a shortfall of $46,300 ($196,800 concessional contribution amount less 150,500 cash dividend amount). This shortfall amount can be financed from a home loan offset account. Please note that on 1st July 2015 (next financial year), the home loan offset account can be repaid by further dividends for 2015 - 2016 year, hence cash flow for personal expenses will never be a problem and it will be rare that Brett's offset account will be in debit for longer than a week as long as the business has cash to pay dividends. Step 2: Lodge Individual income tax return early The Individual income tax returns should be lodged as soon as possible, say on 1st July 2015 which will result in a refund of $64,500 each (Franking credit $64,500 less nil tax on taxable income of 18,200). With the refund of $64,500 Brett can pay off the home loan of $46,300 and be left with $18,200 cash, which can be used for day to day living expenses. The tax return will look something like this Dividend income 150,500 Franking credit 64,500 Total Income 215,000 Less concessional contribution 196,800 Taxable income 18,200 Tax on income Nil Tax Refund 64,500 Cash situation: Dividend Received 150,500 Add Tax refund 64,500 Less Contributions to Super 196,800
Cash on hand 18,200 Step 3: Lodge SMSF Income tax return late  The ATO can issue an amended assessments for 2015 year only when the SMSF lodges its annual return. The last day to lodge annual return of a SMSF for financial year ended 30th June 2015 is 15th May 2016.The SMSF return should be lodged as late as possible so that amended assessment to Brett is issued as late as possible. Once the SSMF return is lodged, the SMSF will pay tax of 15% on $196,800 which can be reduced by any dividend income or super gearing. However, for our example, let us assume that no such benefits are available and 15% or $29,520 tax is paid and the SMSF has $167,280 to invest.
Cash in SMSF
Contributions Received 196,800 Less 15% tax (29,520) Balance Cash in SMSF 167,280 Step 4: ATO will issue amended assessment  Once the SMSF return is lodged, the ATO will issue an amended assessment to Brett and his wife and include the $161,800 ECC amount (Total contribution $196,800 less $35,000 cap concessional contribution amount for 2015 year) and allow 15% tax offset for the tax already paid on this amount by his SMSF.
The amended assessment will look something like this
Reported Taxable Income $18,200 Add ECC amount $161,800 Total Income $180,000
(Please note that any income above $180,000 is subject to 49% including Medicare levy and budget repair levy - hence this strategy does not give optimum results) Tax on Total Income $58,147 Incl. Medicare Levy & Budget Repair Levy Less 15% rebate on ECC ($161,800) $24,270
Tax to pay $33,877
Since Brett has already received a refund of $64,500 he will have to pay back $33,877 sometime in June 2016, along with excess concessional charge, which is currently estimated to be about 5.83 % of $33,877. This will reduce the net franking credit refund to only $30,623 ($64,500 less $33,877). Brett's Cash situation:
Dividend Received 150,500 Add Tax refund 64,500 Less Contributions to Super 196,800 Less tax to pay 33,877 Cash on hand (15,677) Click here to learn how to Add / Delete members in your SMSF
Step 5: Cash withdrawn from SMSF to pay additional tax
Net cash in hand with Brett will be 18,200 in step 2 less tax to pay in step 4 of $33,877 or cash of $15,677 which can be withdrawn from the SMSF to pay the tax on amended assessment. At SMSF level $196,800 has been contributed which is subject to 15% tax or $29,520. Brett can withdraw from his SMSF $15,677 plus an additional $73,000 for day to day living which he receives from his company as salary after tax. Note that the maximum amount which can be withdrawn by Brett is 85% of the ECC amount or 85% of $161,800 or $137,530.
Tip: It is recommended to withdraw the whole of $137,530 as this is considered as taxable component in the super fund. If this amount is withdrawn and then re-contributed, then it will be treated as non-concessional contribution of tax free component. Cash in SMSF for Brett
Contributions Received 196,800 Less 15% tax (29,520) Less withdrawn to pay tax (15,677) Less withdrawn to replace salary (73,000)
Balance remaining in Super $78,603 If this strategy was not implemented then cash in super will be as follows
Concessional contribution by his company $35,000 Less 15% tax on contribution $29,750 Extra in super $48,853 Which is more than 2.5% times if this strategy was not implemented 
Step 6: Company's cash position Brett and his wife were being paid $100,000 salary plus $35,000 superannuation contribution. However, this deduction will no longer be available, which means that the company will pay additional income tax @ 30%. Cash saving due to salary and super 135,000 Additional tax due to reduced expenses Of wages and Super (40,500) Cash dividend paid (150,500) Cash position of company (56,000) Although the company's cash position is worse off by $56,000 of which $40,500 is additional tax paid. We also think that any company tax paid will ultimately be paid to business owners as fully franked dividends and is not an ultimate tax liability which is paid to the ATO and never be refunded. Company tax is simply an amount which is handed to the tax office before claiming it back at the individual level in the form refundable franking credits.
Click here to learn how a QS Report can increase your depreciation claim for your rental property
Conclusion  Implementing all of the above strategies requires careful planning and some parts of the strategy may come under the embargo of financial advice. We recommend that readers consult their advisers and see how these strategies can help their individual situations. We encourage users to attend our seminars, where many strategies such as these are discussed in detail. | 
