With the changes to super coming in, allowing you to withdraw all of your super tax free at age 60, a strategy has come into play which involves paying interest only on your home mortgage, whilst using the difference between the capital repayments on your mortgage to increase your superannuation contributions.
The theory is that you gain immediate taxation benefits, with the super contributions being salary sacrificed, and when you turn 60, you withdraw what you borrowed on your mortgage and simply pay it back. The way I see this strategy, is it lets you have the lifestyle benefits of home ownership, but allows you to invest your money in assets that you may prefer to property (eg shares).
So I've run the two scenarios through my modelling software. I have taken a 30 year mortgage, with an interest rate of 8%. The super fund I have used is invested "aggressively". with projected return of around 9% pa (after tax). The loan is for $300,000.
The net benefit of the interest only loan strategy comes out to be $34,000. That is $34,000 in 30 years time. In today's dollars it's more like $15,000. Obviously, if the rate of return on the super fund is higher than 9% pa, the benefit would be greater, but I really wanted to be conservative on my projections.
There's also the added risk that interest rates will rise (or more favourable, decrease) and the legislative risk that super may be preserved beyond 60 for 30 year olds (lets hope not!).
In short, unless you can get a guaranteed return of over 10% pa over 30 years, this strategy really won't provide a huge benefit. The risks are far greater than the rewards.
The best strategy in my opinion would be to repay your mortgage asap, then once it's paid off increase your super contributions. That way you get the best of both worlds!
Showing posts with label superannuation. Show all posts
Showing posts with label superannuation. Show all posts
Sunday, April 15, 2007
Thursday, March 29, 2007
Tax free pensions... until you die
The most well documented aspect of the super changes. From next Financial Year, Pensions paid from super and lump sum super withdrawals will be tax free if you're aged over 60. However, this isn't where tax in super ends. There is another tax, the "death tax" when the 'taxable' components of pensions/super are paid to non-dependants when someone dies, they are taxed at 15%.
Now, the definition of a dependant in this case is basically spouse or dependant child, under age 18, which generally means that those of us who have Boomer parents transferring their assets into super, are not going to see everything when our parents unfortunately, but inevitably depart this fine planet.
However, given that super benefits can be withdrawn tax free over 60, those who unfortunately die slowly, are able to withdraw their entire super benefits before they die. However, those who probably more fortunately die quickly do not get this opportunity.
This needs to be changed. Time for the Government to remove this 15% death tax. On one hand they are trying to make people put as much as they can into super, but aren't providing the estate planning benefits. Assets held outside of super can be transferred to non-dependants with no tax liability (however the recipient inherits the original purchase date & price).
John Howard and Peter Costello, time to provide something for us younger generation. The generation who's vote doesn't seem to be important to you. You can't buy our vote on the low interest rate lie this election.
Until then, the benefit of a slow and painful death will only be the tax savings one can provide to their children.
Now, the definition of a dependant in this case is basically spouse or dependant child, under age 18, which generally means that those of us who have Boomer parents transferring their assets into super, are not going to see everything when our parents unfortunately, but inevitably depart this fine planet.
However, given that super benefits can be withdrawn tax free over 60, those who unfortunately die slowly, are able to withdraw their entire super benefits before they die. However, those who probably more fortunately die quickly do not get this opportunity.
This needs to be changed. Time for the Government to remove this 15% death tax. On one hand they are trying to make people put as much as they can into super, but aren't providing the estate planning benefits. Assets held outside of super can be transferred to non-dependants with no tax liability (however the recipient inherits the original purchase date & price).
John Howard and Peter Costello, time to provide something for us younger generation. The generation who's vote doesn't seem to be important to you. You can't buy our vote on the low interest rate lie this election.
Until then, the benefit of a slow and painful death will only be the tax savings one can provide to their children.
Tuesday, March 27, 2007
When tax free share income isn't really tax free... and how to make it tax free!
I was having a bit of a heated discussion with a fella the other day about tax effectiveness of share investing. I offered him advice on how to make his shares even more tax effective, but I'm not sure he understood.
His argument was that he could earn $75,000 a year from his portfolio of shares and not pay a cent tax. This of course is because he holds a portfolio of shares that pay fully franked dividends. Meaning, he is entitled to a 30% tax rebate on this income in the form of imputation credits, and as he is on the 30% marginal tax rate, he pays no tax. He then said to me, "Why should I bother with these tax free pensions when I'm receiving tax free income anyway. I agreed, YOU are not paying tax, however SOMEONE IS. By restructuring your affairs, you can get the tax back!
You see, the reason most share income from blue chip stocks contains this 30% credit, is because companies have already paid tax on this income, at the company tax rate, which not suprisinly, is 30%. So, whilst the investor isn't paying tax out of their own pocket, they effectively are, as tax is being withheld before they actually see the income (dividend).
My proposal to this investor (he was over 60), was to get his direct share portfolio into a Self Managed Super Fund (I didn't address Capital Gains Tax, but this would definitely have to be looked at), and then he had two options, leave the funds in the growth phase of super, in which case income is taxed at 15%, or convert it to an allocated pensions, from 1 July, draw the minimum income which is 4%, and whilst within pension the fund pays NO TAX on earnings.
These imputation credits will then be credited back to the fund, which means the tax is basically being paid back and the investment will truly become tax free. If it stays in the growth phase of super, you're looking at half the credit coming back (super pays tax on income at 15%), or if its in pension, the whole credit basically gets added onto returns.
Put simply, if your shares are within the pension phase and you are receiving a dividend yield of 5% fully franked, you're dividend all of a sudden becomes about 7.15%. Pretty good huh!
His argument was that he could earn $75,000 a year from his portfolio of shares and not pay a cent tax. This of course is because he holds a portfolio of shares that pay fully franked dividends. Meaning, he is entitled to a 30% tax rebate on this income in the form of imputation credits, and as he is on the 30% marginal tax rate, he pays no tax. He then said to me, "Why should I bother with these tax free pensions when I'm receiving tax free income anyway. I agreed, YOU are not paying tax, however SOMEONE IS. By restructuring your affairs, you can get the tax back!
You see, the reason most share income from blue chip stocks contains this 30% credit, is because companies have already paid tax on this income, at the company tax rate, which not suprisinly, is 30%. So, whilst the investor isn't paying tax out of their own pocket, they effectively are, as tax is being withheld before they actually see the income (dividend).
My proposal to this investor (he was over 60), was to get his direct share portfolio into a Self Managed Super Fund (I didn't address Capital Gains Tax, but this would definitely have to be looked at), and then he had two options, leave the funds in the growth phase of super, in which case income is taxed at 15%, or convert it to an allocated pensions, from 1 July, draw the minimum income which is 4%, and whilst within pension the fund pays NO TAX on earnings.
These imputation credits will then be credited back to the fund, which means the tax is basically being paid back and the investment will truly become tax free. If it stays in the growth phase of super, you're looking at half the credit coming back (super pays tax on income at 15%), or if its in pension, the whole credit basically gets added onto returns.
Put simply, if your shares are within the pension phase and you are receiving a dividend yield of 5% fully franked, you're dividend all of a sudden becomes about 7.15%. Pretty good huh!
Tuesday, March 13, 2007
The lesser known super changes from 1 July
The big changes to super are extremely well documented. Tax free benefits from 60, undeducted contribution limits abolition of RBL's, etc, etc. We've heard these 1000 times already! However, there are some changes to super which aren't as well known. I will attempt to uncover a few of these (although like everyone else, I'm still wading through all the info out there).
1. One off contributions for 65 year olds.
The contribution rules to super mean that you must satisfy the 'activity test' (gainful employment of 40 hours over a 30 day period during that financial year) to contribute to super if you are aged 65 or over, with no contributions allowed at all if you're 75 or over. However, because there was some initial confusion from Budget night about what the limits were going to be, the Government has decided that if you were aged 64 or younger on 10 May, 2006, you are able to contribute up to the $1 million limit. Good news for all those 65 year old readers out there (yeah, I know there's a heap of you!).
2. One deductible contribution limit.
The new rules mean everyone will have a limit of deductible super contributions of $50,000 per annum (or $100,000 for the next few years if you're aged over 50). In the past there was a loophole in the system, where you could salary sacrifice into super up to your aged based limit, reduce your salary to less than 10% of your total income (ie you also have significant investment income and/or capital gains), and then make deductible contributions up to your aged based limit. Meaning you're claiming two lots of concessionally taxed contributions. Unfortunately, this rule is now gone. $50,000 is it!
3. Cashing out of super comes from all components.
A common pre-retirement strategy is to cash out part of the taxable components of your super (currently called pre/post 1983 components) and re-contribute these funds as an undeducted contribution. This makes your retirement income stream more tax effective, as more of it is returned to you tax free. Come 1 July, the effectiveness of this strategy is diminished. As pensions for those aged over 60 will be tax free anyway, there will be no immediate tax saving. However, death benefits paid from the taxable components to non-dependants will be taxed at 15%, so for estate planning purposes, the strategy is still relevant. The problem is, unlike currently, where you can nominate where your withdrawals will come from, as at 1 July, you will have to withdraw from equal proportions. Therefore, if your superannuation is made up of 50% taxable, and 50% tax exempt components and you want to withdraw $100,000 worth of taxable benefits, you will have to make a total withdrawal of $200,000.
This is fine if you have a small super balance. You simply withdraw it and then recontribute it. But the $150,000 contribution limits (or $450,000 over 3 years) must not be forgotten. The last thing you want is to withdraw the funds, then not be able to put them back in, just to save your non-dependant children a few bucks (this is a sore point of mine that I will approach in another post).
There you go. A few of the lesser known (and possibly not quite as exciting) changes to super from 1 July 2o07.
1. One off contributions for 65 year olds.
The contribution rules to super mean that you must satisfy the 'activity test' (gainful employment of 40 hours over a 30 day period during that financial year) to contribute to super if you are aged 65 or over, with no contributions allowed at all if you're 75 or over. However, because there was some initial confusion from Budget night about what the limits were going to be, the Government has decided that if you were aged 64 or younger on 10 May, 2006, you are able to contribute up to the $1 million limit. Good news for all those 65 year old readers out there (yeah, I know there's a heap of you!).
2. One deductible contribution limit.
The new rules mean everyone will have a limit of deductible super contributions of $50,000 per annum (or $100,000 for the next few years if you're aged over 50). In the past there was a loophole in the system, where you could salary sacrifice into super up to your aged based limit, reduce your salary to less than 10% of your total income (ie you also have significant investment income and/or capital gains), and then make deductible contributions up to your aged based limit. Meaning you're claiming two lots of concessionally taxed contributions. Unfortunately, this rule is now gone. $50,000 is it!
3. Cashing out of super comes from all components.
A common pre-retirement strategy is to cash out part of the taxable components of your super (currently called pre/post 1983 components) and re-contribute these funds as an undeducted contribution. This makes your retirement income stream more tax effective, as more of it is returned to you tax free. Come 1 July, the effectiveness of this strategy is diminished. As pensions for those aged over 60 will be tax free anyway, there will be no immediate tax saving. However, death benefits paid from the taxable components to non-dependants will be taxed at 15%, so for estate planning purposes, the strategy is still relevant. The problem is, unlike currently, where you can nominate where your withdrawals will come from, as at 1 July, you will have to withdraw from equal proportions. Therefore, if your superannuation is made up of 50% taxable, and 50% tax exempt components and you want to withdraw $100,000 worth of taxable benefits, you will have to make a total withdrawal of $200,000.
This is fine if you have a small super balance. You simply withdraw it and then recontribute it. But the $150,000 contribution limits (or $450,000 over 3 years) must not be forgotten. The last thing you want is to withdraw the funds, then not be able to put them back in, just to save your non-dependant children a few bucks (this is a sore point of mine that I will approach in another post).
There you go. A few of the lesser known (and possibly not quite as exciting) changes to super from 1 July 2o07.
Monday, March 12, 2007
Never too early to start saving for retirement
I often see financial advice columns strongly advising against young people putting additional money into super, due to the fact that they can't access it until they're 60.
Fair enough, as there's likely to be significant expenditure requirements between 25 and 60 (I'm thinking exorbitant mortgages), where these funds could be better used. However, retirement saving should not be forgotten. Compulsory superannuation contributions of 9% are unlikely to provide enough to retire comfortably on, even for those of us who have been benefiting from these contributions for our whole working lives. You have to start savings for your retirement sometimes, the earlier you get the money in, the more time you will benefit from compounding growth in this tax effective environment.
I ran a little experiment to see for myself what the difference would be.
We are talking about a 25 year old here, retiring at age 60, with $20,000 currently in super and an annual income of $60,000. The following graph estimates in today's dollars the estimated end benefit, assuming the funds are invested 'aggressively' (ie, entirely in shares and property) and they receive the standard 9% employer contributions.
As it can be seen, an end benefit of around $480,000. Not that much, considering 9% on top of your income every year has been contributed to super. I think I'll be wanting more than that to retire on!
So, lets say the 25 year old decides to salary sacrifice around $100 a week (I'll use $5,000 pa). These contributions willbe taxed at 15% upon contribution. This is what we're looking at in today's dollars:
An end benefit of around $820,000. Looking like a much more healthy balance!
You really can't beat starting early. In reality, few 25 year olds are likely to forgo this sort of money for 35 years, but the key to benefiting from compounding returns is to start early. Thanks to the great Paul Keating, we will save significantly for our retirements without having to do too much of the hard work ourselves, but with a little help will end up with a much more comfortable retirement!
Fair enough, as there's likely to be significant expenditure requirements between 25 and 60 (I'm thinking exorbitant mortgages), where these funds could be better used. However, retirement saving should not be forgotten. Compulsory superannuation contributions of 9% are unlikely to provide enough to retire comfortably on, even for those of us who have been benefiting from these contributions for our whole working lives. You have to start savings for your retirement sometimes, the earlier you get the money in, the more time you will benefit from compounding growth in this tax effective environment.
I ran a little experiment to see for myself what the difference would be.
We are talking about a 25 year old here, retiring at age 60, with $20,000 currently in super and an annual income of $60,000. The following graph estimates in today's dollars the estimated end benefit, assuming the funds are invested 'aggressively' (ie, entirely in shares and property) and they receive the standard 9% employer contributions.
As it can be seen, an end benefit of around $480,000. Not that much, considering 9% on top of your income every year has been contributed to super. I think I'll be wanting more than that to retire on!
So, lets say the 25 year old decides to salary sacrifice around $100 a week (I'll use $5,000 pa). These contributions willbe taxed at 15% upon contribution. This is what we're looking at in today's dollars:
An end benefit of around $820,000. Looking like a much more healthy balance!
You really can't beat starting early. In reality, few 25 year olds are likely to forgo this sort of money for 35 years, but the key to benefiting from compounding returns is to start early. Thanks to the great Paul Keating, we will save significantly for our retirements without having to do too much of the hard work ourselves, but with a little help will end up with a much more comfortable retirement!
Wednesday, February 28, 2007
The Good, The Bad, and the Bull Run
It was only yesterday that I posted on how we have had an incredible Bull Run over the last 4 months, and it was only a matter of time until there was a slip up along the way.
Quite often, it only takes one small trigger for the domino effect that is falling share markets across the world. Today we saw after whispers that the Chinese Government, in an attempt to slow down growth, will begin taxing capital gains on shares bought and sold on the Chinese share market. This triggered the largest sell off on the Chinese market in 10 years, followed by the largest in the US and Australian markets since September 11.
So, investors that have panicked to sell off their investments and place them in super (of which possibly close to 50% is invested in Australian equities), today saw thousands wiped off the values of their super. I am now kicking myself that I didn't practice what I preach and Short Sell the S&P ASX 200 Index yesterday.
What is Ironic is that those cautious investors who have been sitting on the fence, waiting for the legislation to be passed through Parliament finally got the news they have been waiting for this morning. The super changes that have been proposed have been signed off by the Senate and are now Law. Good news coming to those who wait, or just a fortunate coincidence of events?
Is the Bull Run finally over? Most think not. The market is likely simply correct to more sustainable levels, consolidate for a while, and run again when we've all forgotten about the issues of today. Such is the nature of the beast.
Quite often, it only takes one small trigger for the domino effect that is falling share markets across the world. Today we saw after whispers that the Chinese Government, in an attempt to slow down growth, will begin taxing capital gains on shares bought and sold on the Chinese share market. This triggered the largest sell off on the Chinese market in 10 years, followed by the largest in the US and Australian markets since September 11.
So, investors that have panicked to sell off their investments and place them in super (of which possibly close to 50% is invested in Australian equities), today saw thousands wiped off the values of their super. I am now kicking myself that I didn't practice what I preach and Short Sell the S&P ASX 200 Index yesterday.
What is Ironic is that those cautious investors who have been sitting on the fence, waiting for the legislation to be passed through Parliament finally got the news they have been waiting for this morning. The super changes that have been proposed have been signed off by the Senate and are now Law. Good news coming to those who wait, or just a fortunate coincidence of events?
Is the Bull Run finally over? Most think not. The market is likely simply correct to more sustainable levels, consolidate for a while, and run again when we've all forgotten about the issues of today. Such is the nature of the beast.
Sunday, February 25, 2007
A mad rush out of the bricks and mortar
When the Federal Government announced the transitional arrangements to super, with up to $1,000,000 per person being able to be contributed between 9 May 2006 and 30 June 2007, we all expected a mad rush on the Boomers selling up their assets and dumping the proceeds into super.
Well it looks like it's started. Carrie LaFranz reports on how Real Estate listings are well and truly on the rise, with a large number of listing reportedly being made purely to take advantage of the new rules. The proceeds, when thrown into super, are helping contribute to the Bull Run that our market is currently having.
All of a sudden the Baby Boomer's love affair with bricks and mortar has shifted, thanks to Mr Costello offering them tax free retirements. It goes to show, the "property is the best form investment" mentality that many Boomers exhibit is soon forgotten when they are presented with the opportunity to save a few dollars in tax.
However, before you get rid of your investment property, which is apparently about to increase its yield by up to 20%, at a possible discount due to a glut of For Sale signs in front yards, there may be alternative strategies available to you.
1. Sell your properties later. If you're part of a couple, you can contribute $150,000 each to super every year until you turn 65. This can be averaged out over a 3 year period, effectively allowing a one off $450,000 contribution each. Now lets assume you sell a property just prior to July one year, you can put in $150,000 each before July, and then $450,000 each after July. This is a total of $1.2 million.
2. Borrow to contribute. This one should be treated with caution. However, if you think your property would fetch more after July, when the glut of sales declines, you could borrow against your property now, and contribute this to super, paying the loan off when you sell the property. However, you will be liable to pay interest on this loan which is not deductible.
3. Transfer your property to a self managed super fund. If you own commercial property, this can possibly be transferred to Self Managed Fund. Capital gains tax will be payable, as you are effectively transferring ownership to another entity. Unfortunately domestic property cannot be transferred to a SMSF.
Before you rush to sell your investments, have a think about the other options available. Tax should be at the front of your mind. If the capital gains tax you will be paying is going to be a lot, the tax free status of super in pension phase may not be worth it. There are ways to lower this tax payable, but that's for another time.
Well it looks like it's started. Carrie LaFranz reports on how Real Estate listings are well and truly on the rise, with a large number of listing reportedly being made purely to take advantage of the new rules. The proceeds, when thrown into super, are helping contribute to the Bull Run that our market is currently having.
All of a sudden the Baby Boomer's love affair with bricks and mortar has shifted, thanks to Mr Costello offering them tax free retirements. It goes to show, the "property is the best form investment" mentality that many Boomers exhibit is soon forgotten when they are presented with the opportunity to save a few dollars in tax.
However, before you get rid of your investment property, which is apparently about to increase its yield by up to 20%, at a possible discount due to a glut of For Sale signs in front yards, there may be alternative strategies available to you.
1. Sell your properties later. If you're part of a couple, you can contribute $150,000 each to super every year until you turn 65. This can be averaged out over a 3 year period, effectively allowing a one off $450,000 contribution each. Now lets assume you sell a property just prior to July one year, you can put in $150,000 each before July, and then $450,000 each after July. This is a total of $1.2 million.
2. Borrow to contribute. This one should be treated with caution. However, if you think your property would fetch more after July, when the glut of sales declines, you could borrow against your property now, and contribute this to super, paying the loan off when you sell the property. However, you will be liable to pay interest on this loan which is not deductible.
3. Transfer your property to a self managed super fund. If you own commercial property, this can possibly be transferred to Self Managed Fund. Capital gains tax will be payable, as you are effectively transferring ownership to another entity. Unfortunately domestic property cannot be transferred to a SMSF.
Before you rush to sell your investments, have a think about the other options available. Tax should be at the front of your mind. If the capital gains tax you will be paying is going to be a lot, the tax free status of super in pension phase may not be worth it. There are ways to lower this tax payable, but that's for another time.
Thursday, February 22, 2007
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.
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.
Monday, February 19, 2007
The truth about "simpler super"
We all remember the night. May 9, 2006. A mid term budget. Nobody expected much. The usual, token tax cuts and rebates to families. We all expected the big announcements to come this year in a lead up to an election.
We saw Peter Costello with that usual smug look on his face to announce "the biggest change to superannuation that Australia has seen". And the ability for "average Australians to not need to pay for expensive financial planners to access their retirement benefits".
This was a huge change to superannuation. The biggest? Possibly not. I still believe the Superannuation Guarantee Scheme (SGC) implemented by the Hawke/Keating Government in 1992 was the biggest change to super we will ever see. However, there were some fundamental changes announced.
Some of these are:
I recently went to a course that discussed the budget changes. The general consensus to come from the course was, how did Costello sell this to us as 'simpler superannuation'? The changes are incredibly complex, especially the transitional rules which apply for about the next 5 years. Don't listen to the garbage that Costello sold us that there is now no need to see a financial planner! See an adviser and make sure you are maximising your retirement benefits.
I plan to use the following weeks to discuss some of these issues. Please contact me if there is anything in particular you would like to know more info about.
For more information, have a look at the Simpler Superannuation web site.
We saw Peter Costello with that usual smug look on his face to announce "the biggest change to superannuation that Australia has seen". And the ability for "average Australians to not need to pay for expensive financial planners to access their retirement benefits".
This was a huge change to superannuation. The biggest? Possibly not. I still believe the Superannuation Guarantee Scheme (SGC) implemented by the Hawke/Keating Government in 1992 was the biggest change to super we will ever see. However, there were some fundamental changes announced.
Some of these are:
- Tax free retirement benefits for those aged over 60.
- Abolition of Rasonable Benefits Limits.
- Funds are able to remain in the growth phase of super indefinitely.
- The assets test for social security benefits will be expanded to allow more people access to Social Security Entitlements.
I recently went to a course that discussed the budget changes. The general consensus to come from the course was, how did Costello sell this to us as 'simpler superannuation'? The changes are incredibly complex, especially the transitional rules which apply for about the next 5 years. Don't listen to the garbage that Costello sold us that there is now no need to see a financial planner! See an adviser and make sure you are maximising your retirement benefits.
I plan to use the following weeks to discuss some of these issues. Please contact me if there is anything in particular you would like to know more info about.
For more information, have a look at the Simpler Superannuation web site.
Sunday, February 18, 2007
You can't unlock your superannuation!
A colleague of mine came across this one this week and David Koch mentioned it in his Sunday paper column today, so it's obviously a wide scale problem.
There are firms out there offering to provide you with access to your superannuation. Now, there are a few ways you can gain access to your super, they are as follows:
Now, it can be seen, that if you are under 55, your super is pretty much locked away. After all, super is there to fund your retirement, not buy you a new boat! However, these shonky operators are offering to roll all of your super into a Self Managed Super Fund, and provide you with access to the funds. Generally, a Self Managed Fund involves setting up a bank account, and as the Trustee of the fund, you are granted access to the account to invest from. The funds in the account are not to be used for your personal lifestyle expenses or "investing" at The Crown Casino! They are to invest in the fund, and regular audits and reporting helps to ensure they are invested appropriately.
I'm not sure how these 'dodgy brothers financial planners' are disclosing themselves, but they are not providing a duty of care to their client to explain that these funds are to be used for investment purposes only. By withdrawing preserved benefits, you are breaking the law and could possibly end up, along with your dodgy adviser, in gaol!
The case I have been made aware of has been reported to APRA. If you are aware of similar schemes, please report them, as at the end of the day, it will only be the unsuspecting consumer who loses out here!
There are firms out there offering to provide you with access to your superannuation. Now, there are a few ways you can gain access to your super, they are as follows:
- Reach age 55 (up to 60 for those of us who are younger) and permanently retire from the workforce.
- Reach age 65 and still be working.
- Become Totally and Permanently Disabled.
- Use Financial Hardship grounds.
Now, it can be seen, that if you are under 55, your super is pretty much locked away. After all, super is there to fund your retirement, not buy you a new boat! However, these shonky operators are offering to roll all of your super into a Self Managed Super Fund, and provide you with access to the funds. Generally, a Self Managed Fund involves setting up a bank account, and as the Trustee of the fund, you are granted access to the account to invest from. The funds in the account are not to be used for your personal lifestyle expenses or "investing" at The Crown Casino! They are to invest in the fund, and regular audits and reporting helps to ensure they are invested appropriately.
I'm not sure how these 'dodgy brothers financial planners' are disclosing themselves, but they are not providing a duty of care to their client to explain that these funds are to be used for investment purposes only. By withdrawing preserved benefits, you are breaking the law and could possibly end up, along with your dodgy adviser, in gaol!
The case I have been made aware of has been reported to APRA. If you are aware of similar schemes, please report them, as at the end of the day, it will only be the unsuspecting consumer who loses out here!
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