Superannuation - More Attractive Than Ever
Part I

And you thought medicine was complicated! Superannuation is no doubt a difficult area and one which seems to be constantly changing. Do not despair however - the changes which took effect on 1 July 2007 have created additional opportunities in some areas and reduced complexity in others. Does either of the following scenarios apply to you? Follow the quick links to find out how you may be able to better structure your finances.

• Have you had multiple employers contributing to your superannuation fund in the past ? Under the new rules you need to be careful not to exceed your contribution limits as it is now your responsibility, not your employer's.
• Are you aged between 55 and 65 and would like to maintain your current income, whilst paying less tax and building your super, all at the same time?

Superannuation, quite simply, is a tax effective means of saving for your retirement. The main advantage of superannuation is that it is encouraged by the government and as a result qualifies for various tax concessions. The highest marginal rate for individuals is 46.5% compared to a flat tax rate of 15% on contributions and income received by superannuation funds.

Where assets are held for more than 12 months, capital gains are taxed at 10% in a superannuation fund. This compares with 23.25% for individuals on the highest marginal rate, and 30% for companies.

The major differences in the new system revolve around Contributions to Super and Access/Taxation of Superannuation Benefits.

Contributions

Tax deductible contributions are now termed "concessional" contributions, whilst undeducted contributions are now termed "non-concessional" contributions.

Concessional Contributions

Scenario 1*

Dr. Jones is employed by his local hospital on a part-time basis and also operates a private practice as a sole trader.

Prior to 1/7/07, he salary sacrificed his total salary from the hospital into superannuation (annual contribution approximately $30,000) and also made the maximum personal contribution for his age base ($40,560).

From 1/7/07 he is now limited to a total concessional contribution limit of $50,000 from all sources. Therefore if he continues to salary sacrifice the $30,000 from his hospital wages, the maximum personal concessional contribution he can now make is $20,000.

*For completeness, please read the above scenario in conjunction with the following information

• Tax deductibility of concessional contributions is subject to certain limits as set out below.
• A new limit of $50,000 per annum will apply from 1 July 2007 (indexed over time) for most people.
• There is a special transitional limit of $100,000 per annum (not indexed) that applies for the first 5 years until June 2012 for anyone over 50. After 1 July 2012, everyone will have the same annual limit of $50,000.
• From 1 July 2007, these limits will apply on a "per individual" rather than "per contributor" basis. This is quite different to the situation before 1 July 2007 where someone with several employers could have contributions up to the old limits from each employer.
• Excess concessional contributions will be taxed at 46.5% and will also count towards the non-concessional contributions cap.
• From 1 July 2007, a self-employed person is entitled to claim a tax deduction on the full amount of their contribution (previously anyone who contributed more than $5,000 was only entitled to a deduction for part of the contribution.)

Non-Concessional Contributions

• "Non-concessional" contributions are made from an individual's personal savings or "after tax" income.
• From 1 July 2007 the limit on "non-concessional" contributions will be $150,000 per annum (indexed)
• Also from 1 July, anyone under age 65 at the start of a financial year is permitted to use the current years limit and the following two years limits in the one year. This effectively allows them to contribute $450,000 in one year under what has been termed a "bring forward" arrangement.
• Excess "non-concessional" contributions will be taxed at 46.5% irrespective of the fact that they are from the after tax savings of the individual.

Access to Superannuation Benefits

Scenario 2*

Dr. Alberto turns 60 on 30 June 2007 and is employed on a permanent basis by a private hospital. He receives a salary package of $250,000 per annum (including superannuation of $13,129). For the 2008 year, Dr. Alberto would be required to pay $89,745 in income tax on this salary. This is an annual net income of $147,126. His Self Managed Superannuation Fund (SMSF) currently has a balance of $475,000.

Dr. Alberto can elect to commence a Transition to Retirement ("TTR") Pension from his fund on 1 July 2007. The maximum amount of pension he is allowed to take in the first year is $47,500. Given that Dr. Alberto is over the age of 60 for the 2007/08 year he will not be required to pay any income tax on his super fund pension.

Dr. Alberto starts his TTR pension on 1 July 2007 and also requests that his employer salary sacrifices an additional $86,870 to superannuation from his employment package to take him up to his maximum contribution limit ($100,000). The result is that he would pay $40,395 less in personal income tax whilst still receiving $148,150 in net salary income ($1,024 more than previously).

The net tax saving for Dr. Alberto in the table above (including contributions tax in his SMSF) is $27,364

*For completeness, please read the above scenario in conjunction with the following information

Modifications effective 10 May 2006 have "removed' the requirement for trustees of a superannuation fund to compulsorily cash a member's benefit when they reach a certain age. Funds may now be retained in the members account indefinitely (or at least until death).

Benefits paid to a person by a superannuation fund may be made in the form of a lump sum or as an income stream (pension), or a combination of both if permitted by the funds deed.

Reasonable Benefit Limits (RBL’s) have been abolished. The RBL system was a way to restrict the accumulation of superannuation by imposing tax penalties on those who exceeded their RBL. Its abolition means that many taxpayers will pay little or no tax on their superannuation benefits during their lifetime.

Superannuation will now consist of just two components - the tax free component and the taxable component. This is a huge improvement on the previous system which had up to 8 different components for each member.

Taxation of Lump Sum Payments

Where benefits are paid as a Lump Sum;

• All payments after 1 July 2007 must be divided between the taxable and tax-free components on a proportional basis.
• The first $140,000 (2007/2008) of the taxed element received over an individual's lifetime is received tax free, and the balance is subject to a maximum rate of tax of 15% plus the Medicare levy.
• A recipient aged between 55 and 60 years would be assessed on the taxable component of any payment, while the 'tax-free' component will be (as the name suggests) completely tax free.
• A recipient over the age of 60 will receive all benefits taken as a lump sum completely tax free

Taxation of Pensions

On commencement of a pension, the trustee of the fund determines the relevant proportions of tax-free and taxable components which existed at the time the pension was established. Each annual pension payment amount is then split between taxable and tax-free in the same proportion.

For recipients aged 55 to 60 years, the taxable proportion is subject to tax at the pensioner's marginal rate less a rebate amounting to 15%.

For recipients over the age of 60 all pension payments from a taxed source (i.e. a normal SMSF) will be received completely tax free.

The major form of pension under the new regulations is known as an "account based" pension. This is a pension payable from a superannuation fund where each member has his/her own account to which investment earnings are credited, and from which pension payments and lump sum withdrawals are made. The pension continues until the death of the pensioner, or until the account balance is exhausted.

Transition to Retirement Pensions

A transition to retirement pension (as in scenario 2) has been available to superannuation members since 1 July 2005. This is an income stream that may be commenced once an individual has reached their 'preservation age' (currently 55 years) even if they have not retired yet. This type of income stream is not subject to any kind of "work test".

The major condition is that the member agrees at the outset that they will not take any cash lump sums unless they meet another condition of release (i.e. permanently retire, or reach age 65). This has created opportunities for a number of "pre-retirement" strategies for those currently aged between 55 and 65 who are still working either full time, or part time.

For instance, a member can choose to reduce their working hours and supplement their income from superannuation. Alternatively, they could continue to work full time whilst salary sacrificing a large part of their income, and utilise their super to supplement their reduced income. Depending on personal circumstances, this can be a tax effective method of boosting super in the lead up to retirement.

Disclaimer: All examples are fictional scenarios, and should not be taken to apply to any specific individuals circumstances. You should contact your advisor to clarify your own personal position.

Matthew Hall
Senior Associate

Custom Accounting Pty Ltd
(Australian Financial Services License No 286854)

website: www.customaccounting.com.au