Super Living Strategies for superannuation 2005/2006
This brochure is published by MLC Limited (ABN 90 000 000 402), 105-153 Miller Street, North Sydney, NSW 2060. It is intended to provide general information only and does not take into account any particular person's objectives, financial situation or needs. Because of this you should, before acting on any advice in this brochure, consider whether it is appropriate to your objectives, financial situation and needs. MLC Nominees Pty Limited (ABN 93 002 814 959) is the issuer of MLC MasterKey Superannuation, MLC MasterKey Business Super, The Employee Retirement Plan and MLC Life Cover Super. MLC Investments Ltd (ABN 30 002 641 661) is the Operator of MLC MasteKey Custom Superannuation and MLC MasterKey Custom Self Managed Super. You should obtain a Product Disclosure Statement (PDS) relating to any financial products mentioned in this brochure and consider it before making any decision about whether to acquire or hold the product. Copies of current disclosure documents are available upon request by phoning the MLC MasterKey Service Centre on 132 652 or on our website at mlc.com.au.
Super is still super Superannuation is still one of the best ways to accumulate wealth and save for your retirement. The main reason, of course, is the favourable tax treatment, where investment earnings are taxed at a maximum rate of 15%. A low tax rate means your money can grow faster than investments that are taxed at a higher rate. Depending on your circumstances there may be some other great incentives like claiming a tax deduction for your own contributions or receiving a co-contribution from the Government. However, to get the most out of superannuation you need to be super smart. You need to understand how the rules work and use them to your advantage. You also have to keep up with the latest rule changes so you can take appropriate action. In this booklet, we outline ten clever strategies that could help you achieve your lifestyle and financial goals. Each of these strategies has long-term implications, so by making the right moves now, you may benefit in the future. This booklet serves as a guide only. To find out if a particular strategy suits your circumstances, we recommend you see a financial adviser. Important Information The information and strategies provided are based on our interpretation of relevant superannuation, social security and taxation laws as at 1 August 2005. Because these laws change frequently, you should obtain advice specific to your own personal circumstances, financial needs and investment objectives, before you decide to implement any of these strategies. The investment returns and investment income shown in the case studies are hypothetical examples only. They do not reflect the historical or future income and returns of any specific financial products. 1
Investment basics Choosing the right mix of assets can make a big difference to your super The graph below reveals growth assets, such as Australian and global shares and property, have delivered higher returns for investors over longer time periods (i.e. seven years or more). However, these asset classes have also been more volatile than cash and bonds over the short-term (i.e. one to three years). Asset class comparison $10,000 invested $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $10,000 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Global Shares Australian Shares Note: Year ended 30 June Australian Property Australian Bonds Cash Inflation This comparison is based on historical performance and is not indicative of future performance (future performance is not guaranteed and is dependent upon economic conditions, investment management and future taxation). Source data is based upon the following: Australian Shares: All Ordinaries Accumulation Index, Global Shares: MSCI World Gross Accumulation Index ($A), Australian Property: Listed Property Trust Accumulation Index, Australian Bonds: Commonwealth Bank Bond Index, Cash: UBS Warburg Bank Bill Index (13 Week Treasury Notes prior to April 1987), Inflation: Consumer Price Index. All income is reinvested. So In most cases, you can't access your super until you retire (see FAQs on page 29). So if you don't plan to retire for another seven years (or more), you may want to consider investing a significant portion of your superannuation in growth assets. But before you make your investment choice, you should also consider your goals, needs, financial situation and your comfort with market ups and downs. To determine a mix of assets that suits your needs, you should speak to a professional financial adviser. 2
Contents Public offer superannuation v self-managed superannuation 4 Strategies at a glance 7 Strategy 1 Boost savings and save tax via salary sacrifice 8 Strategy 2 Top-up your super with help from the Government 10 Strategy 3 Build-up your spouse s super and save tax 12 Strategy 4 Purchase life and TPD insurance tax-effectively 14 Strategy 5 Move assets into super and save tax 16 Strategy 6 Rollover an employer ETP and reduce your tax 18 Strategy 7 Contribute to super and offset CGT 20 Strategy 8 Convert business capital into tax-free retirement benefits 22 Strategy 9 Reduce lump sum tax by merging your super into one fund 24 Strategy 10 Increase your super and withdraw tax-effectively 26 FAQs 28 Glossary 32 3
Public offer superannuation In a public offer superannuation fund, a corporate trustee takes care of all the fund s reporting, management, tax and investment responsibilities. Public offer funds generally suit people who prefer to outsource the management of their superannuation or have smaller account balances. The benefits You don t have to worry about the cost and legal hassle of setting up your own fund, or the ongoing responsibilities of running the fund. You can choose from a range of managed investment options and in some cases direct shares. Your investment receives concessional tax treatment. Tips and Traps While you can only invest in the options offered by the fund, a broad choice of investment options is usually available. Because the trustee makes all the decisions in relation to the management of the fund, you can sit back and relax while someone else does all the hard work. Keep in mind this also means you typically have no say in the way the fund is managed. Some public offer funds offer reduced management fees for larger account balances. Most of the strategies in this book can be implemented through a public offer fund. 4
Self-managed superannuation A self-managed superannuation fund (SMSF) also known as a DIY fund has fewer than five members. All members are trustees of the fund, and all the trustees are members. If you set up a SMSF, you take on all the responsibilities of a trustee. SMSFs are generally more appropriate for people with larger account balances (upwards of $250,000), who want to be actively involved in the management of their superannuation. The benefits Because you re a trustee of the fund, you can exercise more direct control over the investment strategy. You have a choice of managed investments, direct shares and private assets such as property and mortgages. Your investment receives similar concessional tax treatment to a public offer fund. Tips and Traps The secret to successfully managing your own super fund is to get expert advice. Don t try to do it all yourself. As trustee of your own fund, you and the other trustees are responsible for all aspects of the fund including any tasks outsourced to third-party service providers. There are many costs involved in setting up your own fund, including establishment costs, legal costs, ongoing administration costs and investment costs. There are companies who can help you to set up and administer a SMSF. Most of the strategies in this book can be implemented through a SMSF. There are currently over 281,000* self-managed funds in Australia. To find out whether a self-managed fund is right for you, talk to your financial adviser. * APRA Annual Superannuation Bulletin June 2004. 5
Superannuation is a long-term investment. So it makes sense to invest your super in assets that have the potential to provide higher long-term returns. 6
Strategies at a glance Strategy Suitable for Key benefits Page 1 Boost savings and save tax via salary sacrifice Employees and employers Reduce income tax Increase super benefits 8 2 Top-up your super with help from the Government Lower income employees Qualify for a Government co-contribution (up to $1,500) Increase super benefits 10 3 2 Build-up your spouse s super and save tax Couples where one partner (usually the higher income earner) owns the bulk of the super assets Split income in retirement Qualify for a Government co-contribution (up to $1,500) or a spouse offset (up to $540) 12 4 Purchase life and TPD insurance tax-effectively Employees who are eligible to salary sacrifice, employees who are eligible to receive co-contributions, couples where one partner earns a low income and self-employed people Reduce the cost of insurance premiums Purchase more insurance cover 14 5 Move assets into super and save tax Anyone who wants to transfer certain assets into super (restrictions apply) Reduce tax on earnings Increase super benefits 16 6 Rollover an employer ETP and reduce your tax Anyone receiving an employer ETP Save lump sum tax Increase super benefits 18 7 Contribute to super and offset CGT Anyone selling an investment who is eligible to make tax-deductible contributions into superannuation Save CGT Increase super benefits 20 8 Convert business capital into tax-free retirement benefits Small business owners approaching retirement Save CGT Increase super benefits 22 9 Reduce lump sum tax by merging your super into one fund Anyone with more than one super fund and pre-july 1983 service Save lump sum tax Added convenience 24 10 Increase your super and withdraw tax-effectively Anyone with a super benefit and pre-july 1983 service Increase super benefits Save lump sum tax 26 7
Boost savings and save tax via salary sacrifice It's a well-documented fact we all need to take responsibility for funding our retirement. So if you are looking for a simple and tax-effective way to boost your retirement savings, you may want to consider a strategy known as salary sacrifice. Salary sacrifice involves getting your employer to contribute some of your salary, wages or a bonus payment directly into super before tax is deducted at your marginal rate (which could be up to 48.5%*). The advantage of this strategy is that salary sacrifice super contributions are taxed at a maximum rate of 15% a potential tax saving of up to 33.5%. By implementing this strategy you can save on tax and make a larger investment for your retirement. * Includes a Medicare Levy of 1.5%. How does the strategy work? To use this strategy you will need to make an arrangement with your employer that is prospective in nature. In other words, you can only sacrifice income that relates to future performance. When sacrificing regular salary or wages, the arrangement should commence on the first day to which the next pay period relates. However, you may only salary sacrifice a bonus payment to which you have no preexisting entitlement. In practice, this means the arrangement must be made no later than the day before your employer determines your bonus entitlement. In both cases, it's also important to have the agreement thoroughly documented and signed by both parties. Strategy# 01 The benefits This strategy allows you to increase your retirement savings in a tax-effective manner. If you are on the top marginal rate, salary sacrifice enables you to invest 85% of your pre-tax salary, compared to only 51.5% if you invest your take-home pay instead. This strategy is particularly useful if you are nearing retirement and want to maximise your superannuation benefits. 8
Case Study William (aged 45) receives a salary of $65,000 p.a. and his employer provides the minimum level of Superannuation Guarantee support (i.e. 9% of salary for 2005/06). He anticipates receiving a bonus of around $10,000. On the advice of his financial planner, William negotiates with his employer to have any bonus paid directly into his super fund, rather than receiving the money as cash salary. The arrangement, which is documented and signed by both parties before the bonus is determined, will enable William to invest an additional $2,850, as set out in the following table. Bonus as after-tax salary Bonus as salary sacrifice Pre-tax bonus $10,000 $10,000 Less income tax at 43.5%* ($4,350) (N/A) Less contributions tax at 15% (N/A) ($1,500) Net amount to invest $5,650 $8,500 Additional amount to invest $2,850 If William retires in 20 years, the higher initial investment, plus the lower tax rate payable on investment earnings, makes salary sacrifice a more powerful strategy than investing the aftertax bonus within or outside super. This is confirmed in the graph below where we compare the results at William s marginal tax rate of 43.5%*. However, we also show the results if tax is payable at the highest marginal rate of 48.5%*. Clearly, salary sacrifice is one of the best ways to build up a retirement nest egg for middle to higher income earners. * Includes a Medicare Levy of 1.5% The long-term benefits of salary sacrifice ($10,000 invested over 20 years) $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 $31,139 $31,139 $19,716 $21,631 $16,601 $19,143 Salary sacrifice Super (undeducted) Non-super Marginal tax rate: 48.5% 43.5% Tips and Traps A salary sacrifice arrangement may result in a reduction in other benefits such as leave loading, holiday pay and Superannuation Guarantee contributions, as these benefits are often calculated on your base salary. Salary sacrifice contributions must be preserved until permanent retirement after reaching your preservation age (unless you meet another condition of release see FAQs on page 29). So you need to ensure you have sufficient investments outside super if you plan to retire before reaching your preservation age. If you re an employee (and your assessable income plus reportable fringe benefits is less than $58,000 p.a.) you may also want to consider making a personal after-tax super contribution of $1,000. This may enable you to qualify for a Government co-contribution of up to $1,500 (see Strategy 2). Before agreeing to a salary-packaging request, employers should ensure that the amount to be sacrificed, plus the employee's Superannuation Guarantee or employer discretionary contributions, does not exceed the relevant age-based Maximum Deductible Contributions limit (see FAQs on page 28). Although it is possible to sacrifice salary below the minimum entitlement under an industrial award, employers should be aware that they may still be required to provide the minimum salary or wages under industrial law. Assumptions: A 20-year comparison based on a $10,000 pre-tax bonus payment. Total return is 8.0% p.a. (split 3% income and 5% growth). The overall franking level on income is 25%. All figures are after income tax (at 15% on super and 43.5% or 48.5% on non-super), capital gains tax (including discounting) and lump sum tax (does not include the low-tax threshold). These rates are assumed to remain constant over the investment period. 9
Top-up your super with help from the Government If you are a lower income employee you may want to make personal after-tax contributions to a super fund. By implementing this strategy, you can boost your retirement savings and possibly receive a Government co-contribution of up to $1,500 each year. Another benefit is that your own contributions (as well as any associated co-contributions) aren t taxed on entering the super fund and can be received tax-free in retirement either as a lump sum or as part of the regular payments from an income stream investment. Also, investment earnings in a super fund are taxed at a maximum rate of 15%, which is likely to be lower than the marginal tax rate you pay when investing outside super. How does the strategy work? To qualify* for the full co-contribution ($1,500) you generally need to make a personal after-tax super contribution of $1,000 and earn^ less than $28,000 p.a. However, a reduced amount may be paid if you contribute less than $1,000 and/or your earn^ between $28,000 p.a. and $58,000 p.a. The Australian Tax Office (ATO) will determine if you qualify based on the data received from your superannuation fund (usually by 31 October each year for the preceding financial year) and the information contained in your tax return. As a result, there can be a time lag between when you make your personal after-tax contribution and when the Government pays the co-contribution. If you are eligible for the co-contribution, you can nominate which fund you would like to receive the payment. Alternatively, if you don t make a nomination and you have more than one account, the ATO will pay the money into one of your funds based on set criteria. * Other eligibility conditions also apply (see FAQs on page 28). ^ Includes assessable income plus reportable fringe benefits. Note: Some funds or superannuation interests may not be able to receive co-contributions. This includes unfunded public sector schemes, defined benefit interests, traditional policies (such as endowment or whole of life) and insurance only superannuation interests. Strategy# 02 The benefits Receive a super co-contribution from the Government of up to $1,500 p.a. Increase your retirement savings in a tax-effective manner. 10
Case Study Ryan (aged 40) is employed and earns $25,000 p.a. He wants to invest $1,000 per year (from his after-tax salary) so he can build up his retirement savings. If he invests the $1,000 outside super each year (in a unit trust, for example), the earnings will be taxable at his marginal rate of 31.5%*. However, if he invests the money in super, the earnings will only be taxed at a maximum rate of 15%. Also, because he is employed and earns less than $28,000 p.a., he will be entitled to a co-contribution of $1,500 p.a. from the Government. The graph below compares these two approaches if they are maintained over 20 years. As you can see, the combined effect of receiving co-contributions and the lower tax rate on investment earnings will make a big difference to his wealth in retirement. * Includes a Medicare Levy of 1.5% The long-term benefits of co-contributions ($1,000 p.a. in after-tax salary invested over 20 years) $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 $101,714 Invested in super (Includes co-contribution of $1,500 p.a.) $41,870 Invested outside super Assumptions: A 20-year comparison based on an after-tax investment of $1,000 p.a. The superannuation investment (only) attracts a co-contribution of $1,500 p.a. Total return is 8.0% p.a. (split 3% income and 5% growth). The overall franking level on income is 25%. All figures are after income tax (at 15% for super and 31.5% for non-super), Capital Gains Tax (including discounting) and lump sum tax (does not include the low-tax threshold). These rates are assumed to remain constant over the investment period. Tips and Traps Personal after-tax contributions (as well as any associated co-contributions) can t be accessed until you reach your preservation age and permanently retire (unless you meet another condition of release - see FAQs on page 29). You should ensure that you supply your super fund with your Tax File Number so that the Australian Tax Office can correctly determine your entitlement to a co-contribution. If you are a higher income earner and you are currently making salary sacrifice contributions (see Strategy 1), your lower income spouse (if applicable) may also want to make an after-tax contribution so they can qualify for a co-contribution. However, if you have insufficient cash flow to do both, there may be an advantage if you forgo a portion of your salary sacrifice contributions and have your spouse invest the after-tax proceeds into their super account instead. If you want to maximise your eligibility for a co-contribution, you could consider salary sacrificing into super. This could enable you to reduce your income below $58,000 p.a. (so that you qualify for a part co-contribution) or $28,000 p.a. (to qualify for a full co-contribution). You may want to use your co-contribution (if eligible) to purchase insurance through a super fund (see Strategy 4). Alternatively, insurance purchased through a super fund may attract a co-contribution that could then be used to top-up your super investments or purchase even more insurance cover. You could also consider making an after-tax contribution of $3,000 into a super fund on behalf of your spouse (see Strategy 3). If they earn less than $13,800 p.a., this may entitle you to a spouse offset of up to $540. 11
Strategy# 03 Build-up your spouse s super and save tax Where a couple is involved, it is not uncommon for the bulk of the super benefits to be held in the higher income earner s name. In this scenario, it is generally a good idea to try and equalise super benefits by making after-tax contributions into the lower income earner s account. One of the main reasons for doing this is that both members of a couple will be able to use their super to commence a tax-effective income stream (e.g. an allocated pension) and split income in retirement. However, there are also some significant incentives for making regular after-tax super contributions well before retirement. Not only is there the potential for some attractive up-front tax benefits, the maximum tax rate of 15% on investment earnings can make a big difference to the end benefit when compared to investing outside super. How does the strategy work? There are generally two main ways that aftertax contributions can be used to build-up super benefits in the name of the lower income earner. The benefits The lower income earner could make the contributions themselves. If they are employed (and satisfy certain other conditions), this approach could also entitle them to a Government co-contribution of up to $1,500 p.a. (see Strategy 2). However, it may also be possible for the higher income earner to make after-tax super contributions on behalf of their spouse. By using this approach, the higher income earner may qualify for a spouse offset, which can be used to reduce their income tax. The spouse offset is capped at 18% of the first $3,000 contributed each year (i.e. the maximum offset is $540). To qualify for the full offset, the receiving spouse must earn* less than $10,800 in the financial year in which the contribution is made (or between $10,800 and $13,800 to qualify for a partial offset). A spouse under the relevant legislation includes a married or defacto spouse, but does not include a partner (married or defacto) that lives in a different home or a same sex defacto spouse. The receiving spouse must also be under age 65 or, if between 65 and 70, they must have worked at least 40 hours over 30 consecutive days during the financial year. * Includes assessable income plus reportable fringe benefits. By building up your spouse s super you can equalise super benefits and split income tax-effectively in retirement. It may be possible to qualify for up-front tax benefits, such as a Government co-contribution (up to $1,500) or a spouse offset (up to $540). 12
Case Study Jason (aged 45) and Helen (aged 43) are married. Jason is working full-time and earns $80,000 p.a. Helen is working part-time (earning $10,000 p.a.) and is currently making an after-tax super contribution of $1,000 p.a. into her own account. As a result, she is entitled to a Government co-contribution of $1,500 p.a. (see Strategy 2). They plan to invest an additional $3,000 each year in Helen s name to further boost her retirement savings and are considering two options. Jason could make spouse super contributions (on Helen s behalf) which will entitle him to a spouse offset of $540 p.a. This spouse offset will then be reinvested into Helen s super account. Helen could invest the money outside super (via a unit trust, for example). The graph below compares these two approaches if they are maintained over a 20-year period. The long-term benefits of spouse contributions ($3,000 p.a. in after-tax salary invested over 20 years) Tips and Traps Personal after-tax super contributions and spouse contributions are fully preserved within the fund. As a result, a condition of release (see FAQs on page 29) will need to be satisfied before the money can be accessed. Personal after-tax super contributions and spouse contributions are treated as undeducted contributions. As a result, no tax is payable when withdrawn as a lump sum. They also form part of the tax-exempt deductible amount when used to purchase an income stream (such as an allocated pension). $200,000 $150,000 $100,000 $160,934 $137,160 It may be beneficial for low-income spouses that are currently working to consider making a personal contribution with the first $1,000, before arranging to receive a spouse contribution. This is because the matching Government co-contribution is generally a more attractive benefit than the spouse offset. There may be an advantage in using the $50,000 Government co-contribution or spouse offset to purchase insurance cover via a super fund (see Strategy 4). $0 Spouse super Non-super Assumptions: A 20-year comparison based on an after-tax investment of $3,000 p.a. Total return is 8.0% p.a. (split 3% income and 5% growth). The overall franking level on income is 25%. All figures are after income tax (at 15% for super and 16.5% for non-super), capital gains tax (including discounting) and lump sum tax (including the low-tax threshold). These rates are assumed to remain constant over the investment period. As you can see from the graph, when compared to investing outside super, the spouse super strategy is clearly the superior approach resulting in an additional $23,774 for their retirement. Building up super on behalf of a lowerincome earner can be a particularly powerful strategy if the higher income earner is close to their Reasonable Benefit Limit (RBL see FAQs on page 30). Equalising super benefits will potentially become even easier from 1 July 2006. The Government has proposed enabling eligible spouses to split (on an annual basis) a proportion of super contributions made after this date. It is anticipated that the amount that can be split will be limited to 60% of a member s deductible super contributions (including superannuation guarantee and salary sacrifice) and 100% of a member s undeducted (aftertax) super contributions. 13
Purchase life and TPD insurance tax-effectively Many people take out insurance via a personal policy in their own name. However, if you re able to make salary sacrifice contributions, you re eligible for a Government co-contribution, you have a low-income spouse or you re self-employed, you should consider the benefits of insuring through a super fund. By holding life and total and permanent disability (TPD) insurance through super, you may be able to reduce your premiums in some cases by up to 48.5%*. When you take into account the potential tax savings, it s also possible to purchase a higher level of cover, when compared to insuring outside super. How does the strategy work? The same tax deductions and offsets that apply when investing in super also apply to insurance purchased through a super fund. If you re eligible to make salary sacrifice contributions (see Strategy 1), you may be able to purchase insurance through a super fund with pre-tax dollars. If you re employed, earn^ less than $58,000 p.a. and make personal after-tax super contributions, you may be eligible to receive a Government co-contribution (see Strategy 2) that could help you cover the cost of insurance. If you make super contributions on behalf of a low-income spouse (see Strategy 3), you may be able to claim a tax offset of up to $540 p.a. that could be put towards insurance premiums for you or your spouse. If you re self-employed,you can generally claim your super contributions as a tax deduction (up to your age-based Maximum Deductible Contribution limit see FAQs on page 28), regardless of whether the contributions are used by the superannuation fund to purchase investments or insurance. These tax benefits can make it significantly cheaper to insure through a super fund. All you need to do is nominate how your contributions should be allocated between your investments and your insurance policy. Strategy# 04 The 14 benefits * Includes a Medicare Levy of 1.5%. ^ Includes assessable income plus reportable fringe benefits. The tax savings can be used to reduce your after-tax premium or increase your level of insurance cover. This strategy is ideal if you have a young family and you re looking for financial protection.
Case Study Andrew (aged 38) earns a salary of $70,000 p.a. He is married with young children and has a large mortgage. His employer s superannuation fund already provides life and TPD insurance. However, he needs additional cover to help his family pay off their debts and replace his income, should the unthinkable happen. The premium for this additional insurance is $1,130 p.a. If he takes out the additional cover through a personal insurance policy (outside super), he will need to pay the annual premium from his after-tax salary. The pre-tax cost will therefore be $2,000 (i.e. $2,000 less tax at his marginal rate of 43.5%* is $1,130). After speaking to his adviser, Andrew decides to take out an equivalent level of cover through his super fund. He also arranges for his employer to sacrifice $1,130 of his pre-tax salary into his fund and instructs the fund administrator to use this contribution to pay for the insurance premiums. Because super funds receive a tax deduction for death and disability premiums, no contributions tax will be deducted from Andrew s super contribution. As a result, he will be able to purchase the insurance through his super fund with pre-tax dollars resulting in a saving of $870 on the first year s premiums. Insurance purchased outside super (with after-tax salary) Insurance premium (p.a.) $1,130 $1,130 Plus income tax payable on salary at 43.5%* $870 Nil Pre-tax cost of insurance $2,000 $1,130 Saving $870 * Includes a Medicare Levy of 1.5% Insurance purchased within super (via salary sacrifice) Tips and Traps Insurance cover, purchased through a super fund, is owned by the trustee of the super fund, who is responsible for paying benefits subject to relevant legislation and the rules of the fund. When considering insurance cover purchased through a super fund you should be clear on the powers and obligations of the relevant trustee in respect of paying benefits. Death benefits that are less than your Pension Reasonable Benefit Limit (RBL see FAQs on page 30) are taxfree if paid to dependants. However, the amount your dependants receive tax-free may be reduced if you have already received benefits from a superannuation source or you have been paid an employer ETP. Note: Benefits in excess of your RBL may be taxed at up to 48.5%* if received as a cash lump sum. However you, or your dependants can generally receive excess benefits via an income stream investment in a tax-efficient manner. Some funds or superannuation interests may not be able to receive cocontributions. This includes unfunded public sector schemes, defined benefit interests, traditional policies (such as endowment or whole of life) and insurance only superannuation interests. 15
Move assets into super and save tax There are a number of good reasons for setting up your own self-managed super fund (SMSF) or investing via a public offer discretionary master trust (see Glossary). You have a broad choice of managed and direct investments and can decide when assets are bought and sold. Another key benefit is you can usually transfer the ownership of certain assets directly into your fund. By making what is known as an in-specie super contribution, you can take advantage of the lower tax rate on investment earnings and make your retirement savings work harder. How does the strategy work? If you own an asset outside super, you pay tax on the investment earnings at your marginal rate (which could be as high as 48.5%*). However, if you transfer the ownership of certain assets into super, the investment earnings will only be taxed at a maximum rate of 15% a tax saving of up to 33.5% p.a. Admittedly, the change in ownership of the asset will usually mean that Capital Gains Tax (CGT) is payable. Nevertheless, the long-term benefits of a lower tax rate on investment earnings may more than compensate for any potential CGT liability. You may also be able to reduce (or eliminate) your CGT bill if you have any accumulated capital losses or you re eligible to claim your super contributions as a tax-deduction (see Strategy 7). * Includes a Medicare Levy of 1.5%. Strategy# 05 The benefits By transferring an asset you hold in your own name into a super fund you can: Reduce the tax payable on investment earnings. Significantly increase the after-tax benefit available for retirement. 16
Case Study Kate (aged 40) owns some shares that she bought several years ago for $15,000. They re currently worth $20,000 and she plans to use them to fund her retirement. After speaking to her adviser, she decides to contribute the shares in-specie into her self-managed super fund to take advantage of the lower tax rate on investment earnings. By transferring ownership of the shares, she ll need to pay $1,212 in CGT*. Assuming she sells some of the shares to cover her CGT liability, Kate will be able to invest a net amount of $18,788 in her super fund. The following graph compares the results after 20 years of making an in-specie contribution with keeping the shares in her own name. * Kate pays tax at a marginal rate of 48.5% (including a Medicare Levy of 1.5%) and is unable to claim her super contribution as a tax-deduction. She also adopts the 50% CGT method when working out her taxable capital gain and has no capital losses. The long-term benefit of holding assets in super after 20 years (Before CGT on end benefits) $110,000 $106,165 Tips and Traps Under superannuation law, only certain types of assets can be acquired by a fund from a member or relative. This includes shares held in your own name (that are listed on an approved stock exchange), business real property (see Glossary), and widely held unit trusts. The ability to acquire an asset from a member will also be subject to the particular rules of the superannuation fund. If you are considering starting a SMSF, you should be aware there are strict membership and trustee rules (including the requirement that all members of the fund are trustees). As a trustee, you are responsible for the general running of the fund, as well as compliance with the trust deed and superannuation law. $100,000 $90,000 $80,000 $87,115 If you want greater investment flexibility without the burden of running your own fund, a public offer discretionary master trust may be a more viable alternative. These funds offer you an extensive range of investments and usually allow you to make in-specie contributions. $70,000 Shares held in super Shares held in own name Assumptions: A 20-year comparison. Total return is 8.5% p.a. (split 3% income and 5.5% growth). All dividends are re-invested. All dividend income assumes a franking level of 75%. All figures are after income tax (at 48.5% for non-super and 15% for super). These rates are assumed to remain constant over the investment period. By transferring her shares into super, Kate will have approximately $19,000 more for retirement (before CGT). Also, if she uses this money to commence a tax-effective income stream within her SMSF (e.g. an allocated pension), no CGT will be payable. Under the current rules, any assets sold during the pension phase of a super fund are not taxable. Conversely, if she had stuck with her original strategy (i.e. kept the shares in her own name), CGT would have been payable if she needed to sell her shares to meet her lifestyle needs in retirement. You should keep in mind that all new super contributions are preserved (see Glossary). But if you don't need to access the money until you retire, the preservation rules shouldn't really be an issue provided you have sufficient cash outside super to cover any unexpected expenses and emergencies. With some assets (like shares and managed investments) it may be simpler to sell the asset, contribute the proceeds into super and re-purchase the same asset in your super fund. Stamp Duty may be payable on the in-specie transfer in some States and Territories. 17
Rollover an employer ETP and reduce your tax On leaving your employer, you may be entitled to receive an Eligible Termination Payment (ETP) that can be taken as cash or rolled over into a super fund. Examples can include the taxable component of a redundancy payment and an ex-gratia payment, such as a golden handshake (see Glossary). For some people, cashing out some (or all) of an employer ETP could be a sensible strategy. Particularly if you have non tax-deductible debts (e.g. a mortgage), you need extra cash to meet your living expenses or you need to retain access to the money*. However, rolling over an employer ETP could be a smarter alternative if you want to pay less tax and maximise your retirement savings. * Employer ETPs rolled over to a super or rollover fund after 1 July 2004 generally cannot be accessed until you satisfy a condition of release (see FAQs page 29). How does the strategy work? Tax is usually payable on an employer ETP, regardless of how you decide to receive the payment. However, as a general rule, the initial tax bill will be less if you elect to rollover the money. Also, once the payment is invested in a super fund, earnings are only taxed at a maximum rate of 15%. Conversely, if cashed out, earnings from non-super investments are taxed at your marginal rate (which could be as high as 48.5%^). The table below summarises the tax rules that apply in the 2005/06 financial year, assuming your payment falls within your Reasonable Benefit Limit (see Glossary). If you cash-out If you rollover Initial tax on pre-july 1983 component 5% is included in your Nil assessable income and is taxable at your marginal rate Strategy# 06 The Initial tax on post-june 1983 component If under 55 31.5%^ 15% If 55 or over First $129,751 is taxed 15% at 16.5%^ and the rest is taxed at 31.5%^ Tax on investment earnings Up to 48.5%^ Up to 15% ^ Includes a Medicare Levy of 1.5%. benefits 18 You may pay less tax on your employer ETP. Investment earnings in super are concessionally taxed. This strategy can help you to maximise your retirement savings.
Case Study Brendan (aged 40) has been with his employer for ten years and is about to change jobs. He has earned a salary of $65,000 this financial year and anticipates receiving an employer ETP of $60,000 on termination of employment. After tax is taken into account, rolling over his payment to a super fund will enable Brendan to invest an additional $9,900 as the following table reveals. Cash-out ETP Rollover ETP Employer ETP $60,000 $60,000 Less lump sum tax at 31.5% ($18,900) (N/A) Less contributions tax at 15% (N/A) ($9,000) Net amount to invest $41,100 $51,000 Additional amount to invest $9,900 Let s now assume Brendan retires in 20 years. The graph below compares the value of his investment after tax is taken into account (see assumptions). Clearly, the maximum tax rate of 15% on investment earnings in super has made a big difference to the value of his investment. In 20 years time, the super investment is worth over $84,000 more than the non-super alternative. The long-term benefit of rolling over to super over 20 years $250,000 $200,000 $223,755 Tips and Traps If you have the choice, you may want to consider delaying your termination of employment until the new financial year. On 1 July each year, the low-tax threshold on the post-june 1983 component and the Reasonable Benefit Limits (RBLs) are indexed in line with a measure of wage inflation known as AWOTE. If you expect to earn a lower taxable income next financial year (e.g. because you plan to retire or intend taking maternity leave), further tax savings may be made on the pre-july and post-june 1983 components. On leaving your employer, you may be entitled to a range of payments that must be taken as cash (e.g. your final pay, annual leave, long-service leave and the tax-free component of a redundancy payment). These payments should generally be used up first if you need cash to cover your living expenses or pay-off non tax-deductible debts. $150,000 $100,000 $50,000 $139,251 If your position has been made redundant, you should keep in mind that rolling over your employer ETP may help you to maximise your entitlement to social security benefits, such as the Newstart Allowance. $0 Cash-out ETP Rollover ETP Assumptions: A 20 year comparison. Total return is 8% p.a. (split 3% income and 5% growth). All income is re-invested. The overall franking level on income is 25%. All figures are after income tax (at 43.5% for non-super and 15% for super), Capital Gains Tax and lump sum tax on withdrawal from the super fund at age 60 (including the low-tax threshold). These rates are assumed to remain constant over the investment period. If you rollover your employer ETP (and your super fund has a pre-july 1983 service period) the valuable pre-july 1983 component will be applied to your employer ETP as well. As a result, only 5% of the pre-july 1983 component will be taxed at your marginal rate if the benefit is later cashed out. 19
Contribute to super and offset CGT If you have recently sold (or plan to sell) an asset, Capital Gains Tax (CGT) could wipe out up to 48.5%* of your profit. However, the good news is that there are a number of strategies available that enable you to legitimately minimise your CGT liability. If you are self-employed, substantially selfemployed (see Glossary) or under 65 and recently retired, one approach could involve making a tax-deductible contribution into a super fund. By implementing this strategy, you can save on CGT and make a larger after-tax investment. How does the strategy work? To use this strategy, you must be able to contribute to super (e.g. you must be under age 65 or, if between 65 and 70, you must have been gainfully employed for at least 40 hours over a consecutive 30 day period during the relevant financial year). In addition, you can't receive (or be entitled to) any employer superannuation support in the year you make the contribution (unless you meet the criteria for being substantially selfemployed). If you meet these conditions, you can usually claim a tax deduction for the first $5,000 that you contribute to super, plus 75% of the balance up to your relevant aged-based Maximum Deductible Contribution limit (see FAQs on page 28). The tax deduction can then be used to offset some (or all) of your taxable capital gain and reduce your CGT liability. While the tax-deductible portion of your super contribution will attract a contributions tax of 15%, the net tax savings can still be quite significant, as the Case Study clearly illustrates. * Includes a Medicare Levy of 1.5%. Strategy# 07 The benefits You can offset or even eliminate CGT on the sale of ordinary investments by making taxdeductible contributions to superannuation. The tax rate on investment earnings in super is likely to be less than the marginal tax rate you pay on earnings outside super. 20
Case Study Lisa (aged 38) is self-employed and earns a taxable income of $70,000 p.a. She also recently received $50,000 from the sale of some shares she owned for the last ten years including a capital gain of $25,000. Assuming Lisa adopts the 50% CGT discount method when working out her taxable capital gain (and she has no capital losses), she will need to pay $5,438 in tax on her shares at her marginal rate 43.5%*. Before strategy Assessable capital gain $25,000 Less 50% CGT discount ($12,500) Taxable capital gain $12,500 CGT payable at 43.5%* $5,438 After speaking to her financial adviser, Lisa decides to contribute $15,000 from the sale of her shares into super, entitling her to a tax deduction of $12,500^. By implementing this strategy, she will be able to offset her taxable capital gain and eliminate her CGT liability of $5,438. After taking into account the tax payable on her super contribution ($1,875) #,Lisa will be able to reduce her overall tax bill by $3,563. * Includes a Medicare Levy of 1.5% After strategy Assessable capital gain $25,000 Less 50% CGT discount ($12,500) Taxable capital gain $12,500 Less tax deduction for super contribution^ ($12,500) Net taxable gain CGT saved $5,438 Less 15% super contributions tax # ($1,875) Net tax saving $3,563 Nil Tips and Traps To offset your capital gain, the taxdeductible super contribution needs to be made in the same financial year in which the asset is sold. If you use this strategy, the non taxdeductible component of your super contribution is treated as an undeducted contribution (see Glossary). Undeducted contributions do not attract contributions tax and are returned tax-free if withdrawn as a cash lump sum. They also form part of the tax-exempt deductible amount if you use your super to purchase a retirement income stream investment, such as an allocated pension. You may want to consider contributing more into super than the minimum required to offset your CGT liability. The additional tax deduction could then be used to reduce your tax bill if you earn income from other sources (e.g. from self-employment). Rather than selling an asset and transferring the after-tax proceeds into superannuation, it may be possible to contribute certain qualifying assets into super in-specie (see Strategy 5). While the transfer may still result in CGT being payable, this may be offset by claiming a portion of the in-specie contribution as a tax deduction. ^ The tax deduction of $12,500 is well within Lisa s aged-based Maximum Deductible Contribution limit (see FAQs on page 28) of $40,560 in 2005/06 and is calculated as follows [$5,000 + 75% x ($15,000 - $5,000)] = $12,500. # A contributions tax of 15% will be payable on the tax-deductible component of Lisa s super contribution (i.e. $12,500). 21
Convert business capital into tax-free retirement benefits If you are a small business owner, chances are you may not have invested much in super, preferring instead to plough profits back into your business. This makes good sense, except for one thing Capital Gains Tax (CGT). The more tax you pay, the less you have for retirement. There is however, a way you can minimise your CGT bill when you retire and use some of your capital to take full advantage of the superannuation system. By claiming the CGT Retirement Exemption, a small business owner can elect to receive up to $500,000 tax-free when disposing of active business assets. Note: Active business assets can include assets such as land and buildings, but not passive assets such as shares. How does the strategy work? To use this strategy, your net incomeproducing assets (excluding super) must be less than $5 million and your business must be operated as a sole trader, partnership, private company or private trust.* When you retire, you must elect for the CGT Retirement Exemption to apply on (or before) the lodgment of your annual tax return for the year in which you dispose of your business assets. The amount claimed via this concession is called the CGT Exempt component. If you are over age 55, you can use the proceeds to purchase a concessionally taxed income stream (such as an allocated pension) or opt for a cash lump sum. But if you are under age 55, you need to roll over the money into a super or rollover fund to take advantage of the tax-exemption. * Other conditions apply. Speak to your adviser. Strategy# 08 The benefits Apart from eliminating an otherwise taxable capital gain on disposal of your active business assets, this strategy enables you to convert business assets into superannuation assets. The CGT Exempt component is: Tax-exempt when rolled into a super fund (i.e. no contributions tax is payable) Tax-exempt when taken as cash (provided benefits are not excessive see Glossary) Tax-exempt when received as part of a retirement income stream. 22
Case Study Jane (aged 64) owns a business she wants to sell in order to fund her retirement. She has recently found a buyer who is willing to pay $700,000 providing a capital gain of $600,000. If Jane doesn t apply for the CGT Retirement Exemption, she will need to pay $72,750 in CGT after taking into account the general 50% CGT discount* and the 50% Active Assets exemption^. As a result, she will receive a net benefit of $627,250 (see table below). Before strategy Sale proceeds $700,000 Less cost base ($100,000) Nominal capital gain $600,000 Less 50% CGT discount* ($300,000) Net gain after discount $300,000 Less 50% CGT Active Assets exemption^ ($150,000) Net taxable gain $150,000 Tax payable at 48.5% # $72,750 After-tax benefit $627,250 * Individual small business owners (e.g. sole traders and partners) can elect to be taxed on only 50% of the nominal gain. ^ In addition, all small business owners can elect for the 50% CGT Active Assets exemption (see FAQs on page 31) to apply. # Includes a Medicare Levy of 1.5% After strategy If Jane applies for the CGT Retirement Exemption, she could offset her net taxable gain of $150,000 and eliminate her CGT bill of $72,750 completely. By implementing this strategy, she could receive the full sale proceeds of $700,000 without paying any tax. What s more, if she rolled over the $150,000 CGT Exempt component, and invested the balance of the sale proceeds ($550,000) in super as an undeducted contribution, she could purchase an allocated pension and receive tax-free income of over $40,000 each year. Tips and Traps The CGT Exempt component will count towards your Reasonable Benefit Limit (RBL see FAQs on page 30). However, the maximum CGT Exempt amount of $500,000 is not far below the standard lump sum RBL of $648,946 (in 2005/06). If you have existing superannuation benefits you should take them into account when deciding how much of the CGT Exempt amount to claim. If you want to maximise your CGT Retirement Exemption (up to the maximum of $500,000), you can elect to forgo the 50% Active Assets Reduction. This strategy is particularly valuable if you are over age 65 and can't make super contributions. The controller of a private trust or company can claim the CGT Retirement Exemption by selling their shares in the company or their interest in the trust. To qualify, active assets must represent 80% or more of the total value of the company or trust. There is no age limit on rolling over a CGT Exempt component into a super fund. Regardless of when the CGT Exempt component is rolled over, the benefits will be subject to preservation. This means you will need to satisfy a condition of release (see FAQs on page 29) before you can access the benefit as a lump sum or income stream. 23
Reduce lump sum tax by merging your super into one fund If you ve changed jobs frequently over the years, there's a reasonable chance that you may be a member of several super funds. However, if one of your funds has a pre-july 1983 component, you should ensure that you merge your benefits before cashing them out. By implementing this strategy, you can save on lump sum tax and take greater control of your retirement savings. Alternatively, you could eliminate lump sum tax altogether by using your super to purchase an income stream, such as an allocated pension. For more information on the benefits of income stream investments, refer to FAQs on page 31. How does the strategy work? When you merge super benefits, the valuable pre-july 1983 service period (that may have previously only applied to the one benefit) will be applied to your combined benefit. As a result, provided your benefit is not excessive you can increase your pre-july 1983 component (of which only 5% is taxed at your marginal rate) and decrease your post-june 1983 component (which could be taxed as high as 31.5%*). To use this strategy, you need to complete some forms, which enable you to nominate where you want to transfer your benefits to and from. On completion of the forms, your super fund will handle all the necessary paperwork for you. * Includes a Medicare Levy of 1.5% Rollover your super benefits into the one fund Any pre-july 1983 service now applies to the combined benefits Strategy# 09 pre-july 1983 post-june 1983 Fund A The benefits all post-june 1983 Fund B This strategy can create significant tax savings if you intend withdrawing your benefits as a lump sum. Having one fund makes it easier to keep track of your super investments. You may also save on fees and charges. pre-july 1983 post-june 1983 Fund B 24
Case Study Rachael (aged 60) belongs to two super funds. She joined Fund A on 1 July 1973 and the benefit is worth $10,000. Fund B has a balance of $230,000 and contributions commenced on 1 July 1990. If Rachael retired on 1 July 2005 (and cashed out her benefits separately), she would have paid a total of $17,743 in lump sum tax, as set out in the following table. Fund Component Amount Tax payable A Pre-July 1983 $3,125 $68 Post-June 1983 $6,875 Nil B Pre-July 1983 Nil Nil Post-June 1983 $230,000 $17,675 Total tax payable $17,743 Note: Fund A has 10 years pre-july 1983 service and 22 years post-june 1983 service. Fund B has all post- June 1983 service. Now look at what would happen if Rachael merged her benefits into one fund before she retired (e.g. Fund B) and then withdrew the combined amount. She would convert a substantial portion of the post-june 1983 component in Fund B into the pre-july 1983 component. What's more, she would reduce her lump sum tax bill from $17,743 to $7,447 a saving of $10,296. Fund Component Amount Tax payable One fund (e.g. fund B) Pre-July 1983 $75,000 $1,631 Post-June 1983 $165,000 $5,816 Total tax payable $7,447 Note: Rachael pays tax at a marginal rate of 43.5% (including the Medicare Levy of 1.5%) and is entitled to the full value of the ETP low-tax threshold on his post-june 1983 component. Tips and Traps When merging benefits, make sure you keep the fund that meets your current and future needs. Aspects such as flexibility, a choice of investment options, insurance and exit fees should all be considered. If you are entitled to receive an Eligible Termination Payment (e.g. a golden handshake) on termination of employment, consider rolling over the benefit to a super fund. If your period of employment (or the super fund itself) includes a pre-july 1983 service period, the earliest date will be applied to the combined benefits and will increase your total pre-july 1983 component. Where the benefit is later cashed out, only 5% of the pre-july 1983 component will be taxed at your marginal rate. (To find out more about rolling over an employer ETP into super, see Strategy 6). If you have a sufficiently large pre-july 1983 component (as a result of merging benefits) you could consider deferring any lump sum withdrawal to a low-income year to take advantage of a lower marginal tax rate. Before strategy $17,743 Tax payable After strategy $7,447 Tax payable Note: 5% of your pre-july 1983 component is taxable at your marginal rate. $222,257 Net benefit received $232,553 Net benefit received 25
Increase your super and withdraw tax-effectively Making undeducted (after-tax) contributions into a super fund is an effective way to increase your retirement savings, regardless of whether you intend to take a lump sum or an income stream. But if your super contains a pre-july 1983 component, and you plan to take some (or all) of your retirement savings as a cash lump sum, making undeducted contributions can enhance your benefit and potentially reduce your lump sum tax bill. You could, however, eliminate lump sum tax altogether by using your super to purchase an income stream, such as an allocated pension. For more information on the benefits of income stream investments, see FAQs on page 31. How does the strategy work? At the same time as increasing your retirement nest egg, this strategy enables you to take advantage of the set order in which various components of a super benefit are calculated for tax purposes. The favourably taxed pre-july 1983 component is calculated first, based on how long you have been with your employer or the number of years you have been a member of a personal super fund. Once the pre-july 1983 component is calculated, any undeducted contributions that you have made into super are deducted from your benefit. Then the post-june 1983 component is worked out last. But here comes the interesting part. By making undeducted contributions you can increase the pre-july 1983 component (of which only 5% is taxed at your marginal rate) and decrease your post-june 1983 component (which could be taxed as high as 31.5%*). * Includes a Medicare Levy of 1.5% and assumes the benefits are within your Reasonable Benefit Limit (RBL) see FAQs on page 30. Strategy# 10 The benefits Increase super savings by making undeducted contributions (see Glossary). Undeducted contributions are tax-exempt when withdrawn and do not attract contributions tax (although related investment earnings will be subject to tax). Save on lump sum tax by converting some of your post-june 1983 component into the more favourably taxed pre-july 1983 component. 26
Case Study Laurie (aged 57) plans to retire on 30 June 2008. He has a projected super benefit of $300,000 and he started with his employer on 1 July 1975. His total service period would therefore be 33 years, and his pre-july 1983 service would be eight years. Laurie's tax situation at retirement is set out in the following table. Components Amount Tax payable Pre-July 1983 $72,727 $1,582 Undeducted contributions Nil Nil Post-June 1983 $227,273 $16,091 Total $300,000 $17,673 But what would happen if Laurie made an undeducted contribution of $25,000 into his super fund in each of the three years prior to his retirement? The next table reveals the results. Components Amount Tax payable Pre-July 1983 $90,909 $1,977 Undeducted contributions $75,000 Nil Post-June 1983 $209,091 $13,091 Total $375,000 $15,068 Notice how the pre-july 1983 component has increased and the post-june 1983 component has decreased. Not only has Laurie boosted his super benefits by $75,000, his lump sum tax bill has decreased from $17,673 to $15,068 a saving of $2,605! Note: Laurie pays tax at a marginal rate of 43.5% (including the Medicare levy of 1.5%) and is entitled to the full value of the ETP low-tax threshold on his post-june 1983 component. The low-tax threshold used is $129,751 from the 2005/06 tax year this would be higher in 2008. Tips and Traps If you intend taking some (or all) of your super benefit as a lump sum Eligible Termination Payment (ETP), you need to be careful. The Australian Tax Office has previously acted to exclude last minute contributions from being included in a concessionally taxed ETP on the basis that they were made primarily to obtain a tax benefit. Before you implement this strategy, you should therefore speak to your financial adviser. When cashing out your super, you may want to delay the withdrawal until the new financial year. On 1 July each year, the tax-free threshold on the post-june 1983 component and the Reasonable Benefit Limits (RBLs) are increased. If you expect your marginal tax rate will be lower in the new financial year, further tax savings can be made on the pre-july and post-june 1983 components. There are advantages in making undeducted contributions before purchasing an income stream. Undeducted contributions form part of the tax-exempt deductible amount and any earnings on these amounts (taken as income payments) may qualify for the 15% pension offset. All new contributions to a super fund and all earnings on new and existing benefits are subject to preservation. This means you will need to satisfy a condition of release (see FAQs on page 29) before you can access your benefits. 27
FAQs Who can contribute to super? Contributions can generally be made by you or your employer provided at the time of the contribution: You are under age 65. You are over age 65 but less than age 75 and have worked at least 40 hours over 30 consecutive days during the financial year. However, only personal contributions can be made between ages 70 and 75. Your employer is obliged to make the contributions under an award or the Superannuation Guarantee legislation. Anyone with an existing superannuation benefit can rollover the amount to a superannuation fund. Contributions can also be made for a spouse who is under age 65, or over 65 but less than 70 and has been gainfully employed for at least 40 hours over 30 consecutive days during the financial year. How is your super taxed? Tax on contributions Your tax-deductible contributions plus those of your employer form part of the super fund s assessable income and are taxed at a maximum rate of 15%. Tax on investment earnings of super funds The investment earnings of a complying super fund are taxed at a maximum rate of 15%. The rate of tax payable can be reduced with the use of dividend imputation credits and the CGT discount provisions (i.e. the 1/3 CGT discount means that the effective tax rate on realised capital gains is only 10% where the investments have been held for more than 12 months). What tax concessions are available when contributing to super? Tax deduction on super contributions Employers can claim a tax deduction on contributions to a complying super fund up to the Maximum Deductible Contribution (MDC) limits, as follows: Your age Maximum Deductible Contribution limit^ Under 35 $14,603 35 49 $40,560 50 and over $100,587 ^ Indexed annually by Average Weekly Ordinary Time Earnings (AWOTE). If you are self-employed/unsupported # (or substantially selfemployed see Glossary), you can claim a full deduction on the first $5,000 contributed plus 75% of the balance up to the relevant MDC limit. To maximise your allowable deductions, the following contributions should be made: Your age Maximum contribution to claim full tax deduction Under 35 $17,804 35 49 $52,413 50 and over $132,449 # To qualify as unsupported, a person must not receive any employer superannuation support in the financial year the deduction is claimed. Note: While mandated employer contributions still attract a tax deduction after age 70, personal contributions and employer voluntary contributions (including salary sacrifice) are only deductible if they are made to a complying super fund within 28 days of the end of the month in which the person reaches age 70. Co-contributions for lower income employees You may be entitled to a Government co-contribution if: Your assessable income plus reportable fringe benefits are less than $58,000 p.a., At least 10% of your assessable income plus reportable fringe benefits is attributable to eligible employment, You make personal after-tax contributions to your super account ~, You lodge an income tax return, You are under age 71 at the end of the financial year that the personal superannuation contribution is made, and You are not a temporary resident. ~ Salary sacrifice amounts do not qualify as personal contributions. 28
The table below shows the co-contribution you may be entitled to receive if you make personal after-tax super contributions in the 2005/06 financial year. Income* Personal Co-contribution contribution available $28,000 Any amount Personal or less contribution x 1.5 (max. $1,500) $28,000 $0 $1,000 An amount equal $58,000 to the lesser of: Personal contribution x 1.5, or $1,500 [0.05 x (income* $28,000)] $28,000 $1,000 or more $1,500 $58,000 [0.05 x (income* $28,000)] More than Any amount Nil $58,000 * Includes assessable income plus reportable fringe benefits. Spouse contribution tax offset You can claim a tax offset for super contributions that you make on behalf of your spouse. The amount of the offset will depend on your spouse s income^ as follows: Spouse s Contribution You can claim income^ amount an offset of: $10,800 $0 $3,000 18% of or less contributions $10,800 $3,000 or more $540 maximum or less $10,800 Any amount 18% of $13,800 contributions up to $3,000 (minus $1 for every dollar your spouse earns over $10,800) ^ $13,800 or more Any amount Nil Includes assessable income plus reportable fringe benefits. What are the current income tax rates? Marginal tax on income The following table summarises the tax rates that apply to residents in the 2005/06 financial year. Taxable income range $0 $6,000 Nil Tax payable $6,001 $21,600 15% on amount over $6,000 $21,601 $63,000 $2,340 + 30% on amount over $21,600 $63,001 $95,000 $14,760 + 42% on amount over $63,000 Over $95,000 $28,200 + 47% on amount over $95,000 Medicare Levy The Medicare Levy is a levy of 1.5% that is payable on your taxable income on top of normal marginal tax rates. An additional 1% is charged for couples with a combined income (including reportable fringe benefits) over $100,000 ($50,000 for singles) who have no private health insurance. If you earn less than $15,902 p.a. ($26,834 p.a. for couples) you are exempt from the levy. When can you withdraw your super? From 1 July 1999, any new contributions to a super fund and all earnings on new and existing benefits must be preserved. This means you generally cannot withdraw your money, including your existing benefits, until you meet one of the following conditions of release : Retirement after preservation age (55 to 60 see page 30) Leaving an employer after age 60 Attaining age 65 Permanent incapacity Death Severe financial hardship (i.e. you must have received Centrelink benefits for six months consecutively, or nine months accumulatively if over 55) Compassionate grounds (approved by APRA/AT0) Upon permanent departure from Australia for certain temporary residents holding a specified class of visa. If you don t meet any of the conditions of release and you re over your preservation age, you may be able to use some of your preserved super to commence a non-commutable income stream (see Glossary). If you have restricted non-preserved benefits you may be able to access this money if you leave the service of an employer who has contributed into your super fund. Note: You can access unrestricted non-preserved benefits at any time. 29
What are the preservation ages? The age at which you can withdraw your superannuation (i.e. the age at which it s no longer preserved) depends on when you were born. The table below shows the current preservation ages. Date of birth Preservation age Before 1 July 1960 55 1 July 1960 30 June 1961 56 1 July 1961 30 June 1962 57 1 July 1962 30 June 1963 58 1 July 1963 30 June 1964 59 1 July 1964 or after 60 How long can I keep my benefit in super? You can keep your benefit in the accumulation phase of a super fund so long as you: Are under age 65. Are between the ages of 65 and 75 and were gainfully employed for at least 240 hours in the preceding financial year. Were aged 75 or over on 30 June 2004 and continue to be gainfully employed for at least 30 hours per week. In all other circumstances, superannuation benefits must be received as a cash lump sum or be used to purchase an income stream investment (such as an allocated pension). How are withdrawals taxed? Tax on lump sum benefits The following table summarises the lump sum tax rates that apply in the 2005/06 tax year. ETP component Tax treatment Undeducted Contributions Concessional Pre-July 1983 The full amount is tax exempt 5% of the payment is added to the recipient's assessable income in the year of receipt and taxed accordingly 5% of the payment is added to the recipient's assessable income in the year of receipt and taxed accordingly Post-June 1983 Up to age 55 21.5%* (taxed element) From age 55 up to $129,751^ 0% over $129,751^ 16.5%* Post-June 1983 Up to age 55 31.5%* (untaxed element) From age 55 up to $129,751^ 16.5%* over $129,751^ 31.5%* Post 30 June 1994 invalidity The full amount is tax exempt Excessive Post-June 1983 (taxed element) taxed at 39.5%* Balance of excessive components taxed at 48.5%* CGT Exempt The full amount is tax exempt * Includes a Medicare levy of 1.5%. ^ This figure applies from 1 July 2005 and will be indexed each 1 July in line with AWOTE. The limit applies to the aggregate of all post-june 1983 components received after age 55. Reasonable Benefit Limits (RBLs) RBLs are the maximum amount of your superannuation and employer ETP benefits which can receive concessional tax treatment. Any amount you withdraw above your RBL (i.e. an excessive component) will be taxed at a rate of up to 48.5%. The following table summarises these limits for the 2005/06 tax-year. Limit Lump Sum RBL $648,946 # Under what circumstances? If you take your assessable benefits as a cash lump sum, or you use these amounts to purchase an allocated pension or immediate annuity. Pension RBL If you take at least 50% of your $1,297,886 # assessable benefits or 50% of your pension RBL (whichever is less) in the form of a complying income stream (see Glossary). # The limits are indexed annually. Includes benefits previously received. Some people may be eligible for higher transitional RBLs. 30
When a benefit is assessed against the lump sum RBL and the person is less than age 55, the lump sum RBL is discounted by 2.5% for each whole year between the person s current age and their 55th birthday. The Pension RBL is not discounted. The following table sets out the RBL amount for each component. Component Undeducted contributions Pre-July 1983 Super ETP 100% Pre-July 1983 Employer ETP Post-June 1983 taxed element 100% Post-June 1983 untaxed element Concessional Post-30 June 1994 Invalidity Non-qualifying CGT Exempt 100% % counted for RBLs Not counted Not counted* 85% counted Not counted Not counted Not counted * If the employee is an associate of the employer (e.g. a director or a partner), 100% of the pre-july 1983 component will count towards their RBL. What CGT concessions are available to small business owners? Following rule changes on 21 September 1999, small business owners have a greater number of CGT concessions available to them. Some can also take advantage of more than one CGT concession. 50% CGT Active Assets Exemption This is a further 50% exemption available to all small business owners on the disposal of active assets. CGT Retirement Exemption This is available to all small business owners up to a maximum lifetime limit of $500,000. If the small business owner is less than 55 years of age they must roll over the proceeds into a superannuation fund. However, if the small business owner is over 55, they can take the proceeds as cash, roll over the funds to super or purchase an income stream. Note: Other conditions may apply to the above concessions. Speak to your financial adviser. What are the benefits of purchasing an income stream with superannuation money? Rolling over your superannuation to purchase an income stream can provide benefits which aren t available if you take your superannuation as a lump sum. These include: Deferring the payment of lump sum tax Investment earnings of the income stream accumulate tax-free A possible 15% offset on your taxable income payments (this means it s possible to receive up to $33,149 tax free each year for singles and $58,348 for couples combined) You may receive favourable social security treatment which could make you eligible to receive the Age Pension and the benefits associated with it. For further information on the benefits of investing in retirement income streams, see our brochure, Retire in Style. To qualify for these concessions, small business owners must have net assets of less than $5 million and the assets disposed of must be active assets (e.g. land, buildings and goodwill). In addition, the following specific criteria must also be met: 15 year CGT Exemption This is a 100% CGT exemption available to all small business owners on the disposal of active assets held continuously for 15 years. The assets must have been disposed of on or after 20 September 2000 for the purpose of retirement, and the small business owner must be at least 55 years of age or incapacitated. 50% CGT Discount This is a 50% CGT exemption on all assets held for more than 12 months and is only available to individuals and trusts. The exemption must be used before any other concession is claimed. 31
Glossary Allocated pension An account in which you invest your superannuation savings in exchange for a regular and flexible income. Annuity A policy in which you invest super or non-super savings in exchange for a regular predetermined income that is guaranteed for an agreed period of time. Assessable income Income (including capital gains) you receive before deductions. After-tax benefit Your super or income stream benefit after any lump sum tax is deducted. Business real property Any freehold or leasehold interest of a person in real property which is used wholly and exclusively in the person s business. Capital Gains Tax (CGT) A tax on the growth in the value of assets or investments, payable when the gain is realised. If the assets have been held for more than one year, the capital gain receives concessional treatment. Complying income stream A special type of income stream that must meet a number of criteria to enable you to obtain a 50% assets test exemption or qualify for the pension RBL. Complying super fund A superannuation fund that qualifies for concessional tax rates. A complying super fund must meet the requirements that are set down by the Government. Condition of release Circumstance upon which you can withdraw your super benefits. See FAQs on page 29, for more information. Contributions tax A tax of 15% applied to deductible and employer contributions made to a super fund. Deductible amount The portion of your income stream that is not assessed for income tax purposes. This is calculated by dividing the Undeducted Purchase Price by your life expectancy (or fixed term of your annuity or pension where applicable). Discretionary master trust A type of super fund that offers similar investment flexibility to a self-managed fund without the burden of having to be a trustee. Disposal of asset When an asset changes ownership, which can include means other than through sale (e.g. by gift). Relates to Capital Gains Tax. Eligible Termination Payment (ETP) A lump sum super benefit or a payment made by an employer on termination of employment (e.g. golden handshake). For tax purposes, ETPs are split into various components, each of which is taxed differently. Excessive That part of an Eligible Termination Payment or income stream that exceeds an individual s Reasonable Benefit Limit. Ex-gratia payment A payment, usually made in the form of a lump sum, which does not form part of an employee s normal wages or salary. Fringe benefit A benefit provided by your employer in respect of employment. Super contributions made by an employer to a complying super fund are excluded from Fringe Benefits Tax. Fringe Benefits Tax (FBT) A tax payable by your employer on the taxable value of certain fringe benefits that you receive as an employee. The current rate of tax is 48.5%. Gainfully employed When you are engaged in an occupation in which you earn an income. If your sole source of income is through investments, you are not gainfully employed. Income streams Investments that provide a regular income, such as allocated pensions and annuities. In-specie contribution The contribution of an asset into super rather than cash. It is achieved by transferring ownership of the asset to the super fund. Only certain types of assets can be transferred. Life expectancy As determined by reference to the current Australian Life Tables. Lump sum tax The tax that may be payable when you take superannuation or an employer ETP as a cash lump sum. Marginal tax rate The stepped rate of tax you pay on your taxable income. See FAQs on page 29. Non-commutable income stream An income stream that generally cannot be cashed out until you meet a condition of release see FAQs on page 29. Ordinary money Money invested outside of superannuation. Personal super A super fund that is not sponsored by your employer, although your employer may be able to contribute to it. Post-June 1983 component Part of your ETP that relates to employment service or fund membership after 30 June 1983. Post-30 June 1994 Invalidity component Part of your ETP that relates to future service lost through invalidity. Pre-July 1983 component Part of your ETP that relates to employment service or fund membership before 1 July 1983. Preserved benefits Benefits that must be kept in a super fund and cannot be withdrawn until you have met a condition of release that specifically satisfies the preservation rules (e.g. retirement from the workforce after reaching preservation age) see FAQs on page 29. Purchase price The lump sum or contributions used to buy an income stream. Reasonable Benefit Limit (RBL) The maximum amount of concessionally taxed superannuation and employer ETP benefits that you can receive in your lifetime. Amounts over your RBLs are deemed to be 'excessive' when taken in cash and are taxed at a rate of up to 48.5% (includes Medicare Levy of 1.5%). See FAQs on page 30. Restricted non-preserved benefits Non-preserved benefits that can only be withdrawn from the super system when you have met a condition of release (such as when you leave your employer who has made contributions to your super fund on your behalf). Rollover When you move your super benefits directly to a super or rollover fund. Substantially self-employed Where your yearly assessable income from eligible employment plus reportable fringe benefits is less than 10% of your total assessable income plus reportable fringe benefits. Tax deduction An amount that is deducted from your assessable income before tax is calculated. Tax offset An amount deducted off the actual tax you have to pay. You may be able to claim a tax offset in your end of year tax return (e.g. franking credits). Sometimes a tax offset may be taken into account in calculating your PAYG rates. Transfer authority The form that you need to complete to allow your financial institution to transfer your benefits from one super fund to another. Undeducted contributions Amounts that you contribute to a super fund after 30 June 1983 and have not claimed as a tax deduction. Unrestricted non-preserved benefits Benefits that have previously met a condition of release and therefore can be withdrawn from a super fund at any time. Undeducted Purchase Price (UPP) The total of your undeducted contributions, CGT Exempt component and post-30 June 1994 Invalidity component when used to purchase an income stream. 32
Speak to your financial adviser about these solutions to grow your super and protect your assets. Strategies 1, 2, 3, 6, 7, 8, 9, 10 Strategy 4 Strategy 5
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