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RETIREMENT & LIFESTYLE PLANNING | |
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| ISSUE - 27 - Autumn 2006/2007 | |
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Understanding the new super rules
Louise Biti explains how to take full advantage of the superannuation changes announced in the 2006 Federal Budget, most of them due to boost retirement income and make managing your super simpler from 1 July 2007.
Note: At the time of writing legislation to introduce these changes has not yet been passed. Details may change so it is important to seek advice before acting on this information.
Building your retirement savings
From 1 July 2007, any money you receive from your superannuation fund after age 60 will be paid taxfree. The money is tax-free regardless of how much you have saved in superannuation. So the more you save in super, the more tax-free income you can receive in retirement. The government has tightened the rules for how much you can contribute each year into superannuation. This means you may need to plan over many years to build your superannuation. Heavy tax penalties apply if you contribute too much.
New contribution limits – from 1 July
Concessional contributions will be limited to $50,000* in a financial year. If you are age 50 or over, you can contribute up to $100,000 until 30 June 2012. Contributions within these limits are taxed at 15 per cent. But you will pay a further 31.5 per cent tax on contributions above the limits. Self-employed (and non-working people under age 65) will be able to claim a full tax deduction for contributions up to the limit. Currently they can only claim a partial tax deduction. Before the changes, there was no limit on non concessional contributions. The limit is now $150,000* in each financial year. If you are under age 65, you can make larger contributions up to $450,000 in a single year by using the limits for that year and the next two years. A one-off opportunity exists this year (from 10 May 2006 to 30 June 2007) to contribute up to $1 million. You will pay tax of 46.5 per cent on any excess contributions.
In addition to the tax penalties for excess contributions, your contributions will also be taxed at 46.5 per cent if you do not quote your tax file number (TFN) to your superannuation fund. If you sell a small business or receive a compensation payment for an injury, you may be able to contribute an extra $1 million into super without any tax penalty. * This limit will be indexed on 1 July each year in increments of $5000.
Concessional contributions
This includes contributions made by your employer (including Superannuation Guarantee and salary sacrifice contributions). If you are self-employed or not working, it will include any personal contributions for which you claim a tax deduction.
Non-concessionalcontributions
This includes contributions you make from your after-tax income or savings. These are commonly referred to as undeducted contributions. From 1 July 2007, any money you receive from your superannuation fund after age 60 will be paid tax-free. The money is tax-free regardless of how much you have saved in superannuation. So the more you save in super, the more tax-free income you can receive in retirement.
Death Benefits
The new rules will also reduce tax on death benefits paid from superannuation. Death benefits paid to your spouse, children under 18 or any other person who is either a financial dependent or in an interdependency relationship with you are tax-free. This might allow you to hold a higher level of life insurance within your super fund. If the death benefit is paid to another person (e.g. adult children), they will pay tax generally up to 16.5 per cent. Amounts paid from an untaxed source, such as insurance payouts or a government superannuation fund may be taxed at higher rates up to 31.5 per cent. If your superannuation fund started before 1 July 1983 some of your superannuation will be tax-free regardless of who receives the death benefit. Non-concessional contributions are also paid tax-free. Strategies to increase these amounts can reduce tax payable on death benefits.
What to do before 1 July
- review your insurance cover and seekadvice to decide if cover held inside superannuation should be increased.
- review death benefit nominations to ensure they are still current and appropriate
- if your fund started before 1 July 1983, combine part or all of this fund with any other superannuation funds to increase the total tax-free component in death benefits.
Example:
Alice is age 50 and earns $35,000 per year. She wants to start saving for her retirement, and can afford to save $5000 per year from her salary. If Alice invests this money outside superannuation she pays 31.5 per cent tax on the earnings. If she contributes the money into superannuation the earnings are taxed at only 15 per cent. Alice has two options for making contributions:
Option 1 – contribute $5000 from her after-tax salary (non-concessional contribution). This is within her $150,000 limit, so no further tax is payable in the superannuation fund.
Option 2 – ask her employer to salary sacrifice $7300 from her pre-tax salary (concessional contribution). This equates to $5000 after-tax at her marginal tax rate of 31.5 per cent. When added to her superannuation guarantee contributions of $3150
(i.e. $35,000 x 9 per cent) this is within the $50,000 limit. Therefore, the contribution is taxed at only 15 per cent. This allows her to invest a higher amount of $6205.
Regardless of which type of contribution she makes, when she retires after age 60, the contributions and all earnings can be received tax-free.
What to do before 1 July
- check you have quoted your TFN to your superannuation fund
- review salary sacrifice arrangements with your employer to ensure you do not exceed the new limits
- look for opportunities to use the $1 million limit
- check your eligibility for the government co-contribution if you make non-concessional contributions to super. The rules have not changed, but with a co-contribution of 150 per cent of any eligible contributions, it is worth receiving.
Example:
Phil has a super balance of $500,000. He also holds life insurance of $1.5 million inside his super fund. On his way home from work, Phil is involved in a tragic car accident and dies. Before 1 July Phil's wife Brenda receives a $2 million death benefit from his superannuation fund. She receives up to Phil's pension RBL* tax free, but pays 46.5 per cent tax on the excess.
Tax bill = (Total death benefit – Phil's pension RBL) x 46.5 per cent
= (2,000,000 – 1,356,291) x 46.5%
= $299,325
From 1 July Brenda receives the entire $2 million tax-free.
* Reasonable benefit limit – the maximum amount of super you can accumulate with tax concessions. There are two RBL limits, a lump sum RBL and a pension RBL.
Tax-free withdrawals and income
Once you reach age 60, all amounts you receive from superannuation (either as a lump sum or income) are tax-free.* If your money is in an allocated pension you can choose how much to receive each year. The minimum pension payments may be lower from 1 July (from 4 per cent of account balance depending on your age). There will be no upper limit.
* If you access money under age 60, or if it comes from an untaxed source such as a government superannuation fund, some tax is still payable.
Example:
Peter and Lois are retirees with $400,000 each in an allocated pension. They each withdraw a $40,000 pension. In 2006/07 they pay combined tax of $3900. They are not eligible for an age pension from Centrelink and do not qualify for the Commonwealth Seniors Health Card (cut-off limit is $80,000 taxable income for a couple).
From 1 July 2007, the allocated pension income is tax-free and is also not taxable income. This means they pay no tax (a saving of $3900), will qualify for the Seniors
Health Card and will not have to submit a tax return (saving any accountant's fees). The Budget also increased the age pension assets test limits from 20 September 2007. Peter and Lois could become eligible for a small age pension and the Pension Concession Card instead of applying for the Seniors Health Card. Instead of starting a pension, you can now choose to keep money in the accumulation phase of superannuation indefinitely and withdraw lump sums as you need them. However, the earnings continue to be taxed at 15 per cent. Earnings in a pension or annuity are tax-free.
What to do before 1 July
- review your allocated pension's new minimum payment and decide how much to withdraw (be careful to remember that the more you withdraw, the sooner your money will run out)
- check if you will be eligible for a Seniors Health Card or Age Pension and submit the relevant application forms (review age pension after 20 September)
- seek advice on whether a non-commutable income stream is suitable for you before 20 September to take advantage of a 50 per cent assets test exemption.
Example:
Brian has $600,000 in his super fund. He has just turned age 65 and retired. If Brian leaves his money in the accumulation phase he can take any amount he likes at any time. No tax is paid on withdrawals, but assuming the fund earns 8 per cent per year, the fund will pay tax of $7200. If Brian rolls his money to an allocated pension, he can still withdraw any amount, but he must withdraw at least 5 per cent of the balance as a pension. No tax is paid on withdrawals or pension payments. Also no tax is paid by the fund on earnings. This effectively increases Brian's account balance. Pensions and annuities which meet specific rules such as being non-commutable (i.e. no access to lump sum withdrawals) may currently receive a 50 per cent exemption under the age pension assets test. This only applies to eligible income streams purchased before 20 September 2007. The exemption can help increase the amount of age pension you receive.
More
Louise Biti CFP®, MTax, BEc, BA(AS), Dip FP, SF Fin. is Head of Technical Services for financial services provider Asteron.
Web www.asteron.com
Disclaimer: The information in this article is general and does not take into account your particular circumstances. Therefore you should consider whether the information is appropriate having regard to your objectives, financial situation and needs and refer to the relevant Product Disclosure Statement before investing in any product. We recommend specific tax or legal advice be sought before any action is taken. Clients depicted are not real clients.
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