Pre July 2007 Superannuation Tips

As I've previously talked about, there are some huge changes to superannuation about to come into force. The majority of these changes are due to be implemented on 1 July, 2007, whilst others came into effect on budget night, 9 May, 2006. For many of these changes there will be a transitional period with a 5 year window that the changes will take place in.

There are a number of strategies that can be implemented prior to July. Some are obvious, others not so obvious. I will talk about a couple of these changes here.

1. Undeducted Contribution Limits

This has been one of the most publicised change to super from the May Budget. In the past you could make unlimited undeducted contributions (other wise known as after tax contributions) to superannuation as long as you were under age 65 or under 75 and still working. However, this all changed on budget night. From 9 May, you are able to contribute just $150,000 per annum to superannuation as an undeducted contribution. Alternatively, you can contribute $450,000 one year but not be able to contribute for the next two years, allowing you to average out your contribution over three years.

However, soon after these changes were announced, the Federal Government realised that in limiting undeducted contributions, they had destroyed many Australians' retirement plans. You see, previously people would possibly hold money in other assets such as share portfolios and investment properties, sell these just prior to retirement and contribute the proceeds to superannuation to commence a tax effective income stream. Peter Costello's new rules, limited these contributions. Therefore, the Government has decided to allow $1,000,000 worth of contributions per person between 9 May, 2006 and 30 June, 2007.

Therefore, if you have a heap of money sitting outside of superannuation and want to get it in, this is your last chance. Remember though, you will still be allowed to contribute $450,000 from next year. If you have a partner, that means between you, you can get $900,000 into superannuation. So all is not lost.

2. Start your pension after 1 July

If you're between age 55 and 60 read on, if not this does not apply to you. If you've had money in super since before 1983 read on, if not this does not apply to you. Now, I've got rid of all but 0.001% of the population! However, this is an important rule that can easily be forgotten and potentially save thousands in tax.

Currently, if you have had superannuation since before July 1983 (you were most likely a public servant to have super back then), your taxable component of your superannuation will be broken into two components. Your pre-July 1983 and post-June 1983 components. When paid from an allocated pension, these components are treated the same, however, when making lump sum withdrawals or when death benefits are paid to the estate, the components are treated differently.

From 1 July, these components will no longer exist. To simplify super, The Government has decided that all super benefits will be split into two components, "Taxable components" and "Tax Exempt Components". This definitely makes things simpler. However, they must then put all the existing components into one of these two. So, at 30 June, your "pre" components will be 'crystallised' and these components will become part of your tax-exempt part of your super. Undeducted components will also form part of the tax-exempt component.

If your allocated pension is commenced prior to 1 July, the tax free income you receive from it (called the tax deductible amount), will be based on an amount prior to your Pre-July 1983 components being tax free. However, if you start your pension after 1 July, your tax deductible amount will include your crystallised pre 1983 component. Providing you will more of your pension tax free.

If you've already got a pension running, you can simply commute this pension back to super and start a new one, however, the Tax Office is yet to make a ruling on whether this will be classed as "Tax Avoidance" or not, so treat this strategy carefully.

These are just a couple of the strategies available prior to the budget changes taking effect on 1 July, 2007. There are other strategies which I will attempt to address in coming weeks. Remember though, none of this is legislated yet, although with the Coalition controlling both Houses of Parliament, it is likely that most of the proposed changes will be legislated.