Superannuation in 2007

PEOPLE who are or are about to become members of a superannuation fund which is taxed SHOULD FIND THIS INFORMATION USEFUL. It is not suitable for government employees whose pensions are paid from untaxed funds.

THIS ARTICLE FOCUSES ON THE dramatic changes to Superannuation law coming into effect ON 1 july 2007 and considers the appropriate responses for various age groups, both before and after 1 july 2007.

1. Of today's 65 year olds, a man can expect to live to nearly 83, a woman to over 86.

2. When you die, any part of the taxed component of your Super Fund which goes to non-dependants is taxed at 16.5%. This can be avoided with planning.

3. Income Tax rates 2007 - 2008:

    $0 - $6,000   -   Nil

    $6,001 - $30,000   -   15c for each $1 over $6,000

    $30,001 - $75,000   -   $3,600 + 30c for each $1 over $30,000

    $75,001 - $150,000   -   $17,100 + 40c for each $1 over $75,000

    $150,000 plus   -   $47,100 + 45c for each $1 over $150,000

add Medicare Levy of 1.5% of taxable income.

1. Concessional contributions:

Amounts paid into Super for which a member can claim a tax deduction. Taxed inside Super Fund @ 15%. Maximum $50,000p.a. Members above 50 years old have a maximum of $100,000 p.a. until 30 June 2012.

1A. NON-CONCESSIONAL CONTRIBUTIONS:

Amounts paid into Super for which no tax deduction is claimed. Until 30/06/2007 maximum $1 million. From 1/07/2007 maximum $150,000p.a. (on $450,000 over one 3 year period if under 65 in first year).

2. preservation age:

3. Retirement:

If under 60, ceasing "gainful employment" and intending never again to work 10 hours per week or more.

If over 60, when any gainful employment ends.

4. Self-employed:

No employer is making Super contributions for you or your PAYG income is less than 10% of total income.

5. Superannuation guarantee contribution: Employers of under 70 year olds are obliged to pay 9% of an employee's gross earnings into a Super Fund.

6. Tax free component:

That part of your Fund from which the earnings within the Fund or withdrawals are tax free (pre 1983 funds or undeducted contributions)

7. TAXED COMPONENT:

That part of your Fund from which the earnings or withdrawals are taxed (post 1983 tax deducted or salary sacrificed).

There are a number of ways for you to contribute to your super. Here's a quick guide that will help you understand the terms used.

1. Concessional contributions

1.1 Superannuation Guarantee Contribution (SGC)
SGC is the compulsory 9% contribution that your employer is required to make on your behalf.

1.2 Employer Contribution
Additional contributions made by your employer over and above the required 9% SGC.

1.3 Salary Sacrifice Contribution
Employer contributions made on your behalf in lieu of salary.

1.4 Personal Deducted Contributions
Contributions you make for which an income tax deduction is available and claimed.

Only a member who is "substantially self-employed" is eligible, i.e. his employee "income" is less than 10% of total assessable income and is receiving minimal employer contributions.

• MAXIMUM $50,000 P.A. INDEXED
• IF ABOVE 50 YEARS OLD MAXIMUM $100,000 P.A. UNTIL 30 JUNE 2012

2. non-Concessional contributions

2.1 Spouse Undeducted Contribution
Contributions using after-tax income paid by your spouse into your Account.

2.2 Personal Undeducted Contribution
Contributions using after-tax income and/or contributions made by you for which you haven't claimed a tax deduction.

MAXIMUM $150,000 P.A. (INDEXED) OR, IF UNDER 65 IN FIRST YEAR, UP TO $450,000 OVER 3 YEAR PERIOD

2.3 Government Co-contribution
A $1.50 contribution by the Government into an eligible member's Super Fund for each undeducted $1.00 contributed by the member to a maximum of $1,500 for a person earning $28,000 p.a. reducing by $50 per $1,000 of earnings to Nil if earning $58,000.

1. All super benefits from a taxed fund taken from age 60 will be tax free. Your super will be split into two components: Taxable and tax-free. If you take a lump sum between 55 and 59 the tax-free component will be tax-free, as will the first $140,000 (indexed) of the taxable component. Any excess will be taxed at 16.5%.

2. If you start a pension between 55 and 59, the tax-free component will be tax-free. Any excess will be taxed at your marginal rate minus the 15% pension tax offset.

3. Super benefits taken from age 60 will not have to be declared in your tax return.

4. Super fund members will no longer be forced to take their super upon reaching 65 and stopping work, or at age 75. They can leave their money in super indefinitely.

5. Retirement pensions will be simplified and will require only a minimum annual payment based on age. Under the draft regulations, this is 4 % of your account balance under age 65 and rises in increments to 14% if you're 95 or older.

6. Self-employed and other eligible investors will receive a full tax deduction on their super contributions up to age 75. However, amounts exceeding the "concessional" contribution cap will attract a higher rate of tax.

7. To be eligible for a deduction, less than 10% of your assessable income plus reportable fringe benefits must come from employment as an employee.

8. The super co-contribution will also be extended to the self-employed.

9. Undeducted and other "non-concessional" super contributions will be limited to $150.000 a year (indexed). This can be averaged over three years (allowing a one-off contribution of up to $450,000) if you are under 65 at any time in the first year. Excess contributions will be taxed at 46.5% and must be withdrawn from your super account.

10. Deductible or "concessional" contributions will be limited to $50,000 (indexed) a year. A transitional limit of $100,000 will apply if you're 50 or older until June 30, 2012. Excess concessional contributions will be taxed at 31.5% on top of the super fund tax rate of 15%.

11. From September 20, the Social Security 50% assets test exemption on new complying pensions will be abolished. The assets test taper rate will be halved so you lose $1.50 of pension a fortnight for every $1,000 of assets you have above the allowable limit.

12. Benefits from untaxed super schemes (mainly some public service schemes) will be subject to new tax rates. Lump sums up to $1million taken from age 60 will be taxed at 16.5%, with any excess taxed at 46.5%. Pensions taken from age 60 will be taxed at your marginal rate minus a 10% tax offset.

The further you are from retirement age, the more you need to consider the various demands on your financial resources:

• family needs
• education
• home
• holidays

At this stage in your life Super is one of your investment options:

PROS:

1. No access until at least 55 years old (a locked money box!) (NB. The age gradually increases to 60 years between 2015 and 2025)

2. Immediate benefit depends on your marginal tax rate, but if 31.5% inc health levy, $10,000 gross earnings equals $6,850 in hand or $8,500 in Super

3. Ongoing benefit $6,850 in hand and invested @ 10% for 1 year becomes $7,319 after tax

$8,500 in Super and invested @ 10% for 1 year becomes $9,222

4. Capital Gains taxed at only 10%

CONS:

1. So near and yet so far No access until at least 55 and "retired". (Exceptions such as severe financial hardship or permanent incapacity.)

2. Can't borrow to gear - can overcome this.

1) If you "retire" you can draw from your Super account:

  A) A lump sum ($140,000 tax free from taxable component)

  B) A tax free lump sum from the "tax free" or "exempt component". This must be in proportion to the taxable component lump sum relative to the size of the two components in the fund.

  C) A pension (minimum 4% of your Fund assets) which is taxed at concessional rates (15% rebate) on the "taxable component" and tax free on any "tax free component".

2) Without retiring, if born before 1 July 1960 you can start a "transition to retirement allocated pension" of between 4% and 10% of the Super funds account balance each year.

PROS:

a) all future earnings on Super funds used for pensions are tax free

b) the pension is taxed as in 1C above

c) you can live off this income and salary sacrifice back into Super with a generous tax deduction.

d) you could re-contribute the $140,000 tax free amount as a "non-concessional" or partially "concessional" contribution.

CONS:

1) Once your Super Fund starts paying you a pension both that pension and all future income earned inside the Super Fund is tax free.

2) If you "retire" all lump sums withdrawn from Super are tax free.

3) You can continue to pay into your Super Fund

• max $100,000 p.a. tax deductible
• max $150,000 p.a. (or $450,000 over 3 years) non deductible
• no work test necessary

4) At 60 you are entitled to a State Government Senior's Card (if working less than 20 hours per week)

5) At 63 women may become entitled to an age pension

• subject to the income test and assets test
• new assets test starts 20 September 2007

1. You now have access to your Super Fund whether or not you're retired.

2. You can take as much pension or lump sum (tax free) as you like, provided you observe the legal minimum at the time (currently 4% of Fund assets).

3. You can only pay into your Super Fund if you satisfy the "work test" (40 hours of gainful employment in any 30 day period in each financial year)

• up to $100,000 p.a. tax deductible
• up to $150,000 p.a. (or $450,000 over 3 years) non-deductible

Men may become eligible for the Age Pension and Commonwealth Seniors Health Card (means tested)

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