Superannuation has become the hottest topic in town with proposed new legislation set to revolutionise the way people invest and accumulate wealth. Hear about these changes at the upcoming Financial Keys ‘Superannuation Revolution Seminar’. The steady stream of recent and proposed changes has made super; the structure of choice. The target of much of the activity is the ‘Tax Free Pot’ which becomes available upon turning 60, but that’s only part of the story.

Who are the beneficiaries of these changes?

• Wealth accumulators of any age looking to reduce or eliminate tax on their investment portfolios.
• Those over age 55 seeking to reduce income tax on wages and/or business or investment income.
• Retirees drawing a superannuation pension income stream.

Why would you build your long term wealth anywhere else?

• Gone is the super surcharge which added an extra 15% slug to your contributions tax.
• Gone are the Reasonable Benefits Limits (RBL’s) and excess benefits tax.
• Gone is the income tax on retirement pensions or capital withdrawals from age 60.
• Tax on earnings in the pension phase remains nil.
• Tax on pensions from age 55 to age 59 greatly simplified.
• New Transition to Retirement Pensions allow you to access your super while still working. Great for reducing income tax through salary sacrifice or for winding down to semi-retirement.
• Even in the super phase, long before retirement, the maximum rate of tax on earnings is 15%. For capital gains after 12 months the rate is 10%, or pay zero tax on your super earnings and growth through the use of dividend franking credits.
• Gone is the work test for those under age 65. There is no requirement to be working to make super contributions.
• Gone is the requirement to cash out your super. You can leave it in there as long as you like.

When you finally retire after age 60 you can draw an income stream from your super benefit and after 1 July 2007:-

• The entire portfolio will be tax free.
• The earnings will be tax free.
• The income you withdraw will be tax free.
• Any lump sums up to the entire account balance you withdraw will be tax free.

So what’s the rush?
While there is no limit on how much you can now accumulate in super there are now limits on what you can get into super. Those limits apply from 10 May 2006 but there is a one off $1million moratorium which applies until 1 July 2007. Until 1 July 2007 each taxpayer can contribute up to $1 million as an undeducted contribution on top of the aged based deductible limit.

From 1 July 2007 the maximum amount that can be contributed as an undeducted contribution in one year is $150,000 per taxpayer. Although for those under age 65 it is possible to bring forward 3 years of undeducted contributions into one year totalling up to $450,000.This is on top of the deductible limit which will be $50,000 per annum regardless of age. Self employed will be able to claim the full amount of their contribution up to the $50,000 limit.

Those age 50 or over any time in the transitional year will be eligible for a $100,000 annual deductible limit from 2007/2008 to 2011/2012.

Where to from here?
If you want to learn how to benefit from the new world of superannuation, come to the Financial Keys ‘Superannuation Revolution Seminar’ or call one of our advisers and arrange an appointment. Call this office for details.

Andrew Condell

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Whilst there is a revolution occurring, particularly for those who are close to retirement; where does it leave those who have a number of years before they can touch their super?

The new rules allowing unrestricted amounts of money to be accumulated in super are a great change. There is now an enormous incentive to accumulate the majority of a retirement nest egg into the super environment. The tightening of contribution limits, however, is causing many to think about adding to their super sooner rather than later.

The strategy that some adopted in the past of making large contributions to super at or close to retirement is now changed. Also, the $1 million moratorium until 1 July 2007 is generating a lot of activity and asset transfers.

For most people, the 9% compulsory superannuation guarantee contributions will be insufficient to fully fund retirement. This means that at some stage, investors will need to increase super contributions so that they have enough.

The case for increasing contributions is now compelling. Take the example of Mary who is 30 and earns $85,000. She is considering increasing her super contributions though
salary sacrifice by $10,000 p.a. and wants to know the benefit. For starters, she has an immediate saving of $4,150 (41.5%) in personal income tax. But the fund must pay 15% on the contribution so the permanent net saving to her is $2,650 per annum. That’s a 26.5% gain on her money straight away.

In addition, she adds $8,500 to her super fund balance each year. If you assume 7.5% growth and tax of 15% in the fund, she will have an additional $800,000 in her super fund by age 60 on top of her SG minimum amount. She can then draw on her balance as a tax free pension or make tax free lump sum withdrawals.

So, to take advantage of the super ‘carrot’, it’s worthwhile considering increasing the amount of money you are putting into super in your younger years.

From 1 July 2007, the maximum tax deductible contribution for those under age 50 is $50,000 p.a. This amount will be indexed each year. For those who turned 50 in the 2006/07 year, there is a moratorium of $100,000 deductible limit until June 2012. This will not be indexed.

If the incentive is great, shouldn’t you, like Mary, be making larger salary sacrifice
contributions to super from now until retirement? The answer to that question is - ‘it depends’. While super is a powerful savings vehicle, one of its drawbacks is that you can’t touch it until you meet a condition of release. This will be on retirement after age 60 for those born after 1 July 1964; ranging down to age 55 for those born earlier.

So it’s important to build enough wealth outside super to meet mortgage payments, school fees and other expenses that occur prior to retirement. You need to balance those needs with the need to accumulate long term retirement wealth. This will depend on individual circumstances. See a financial adviser to discuss whether salary sacrificing to super is suitable for you

Brendan Gallagher


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World economic growth has been running at quite a pace and as we move into 2007 it is showing signs of gradually slowing down.

The US in particular is experiencing slower growth thanks to the effects of a cooling housing market. In one respect this is good news as this increases the likelihood of the US Federal Reserve easing interest rates sometime this year. There appears to be a soft landing in the US economy which is also good news for the rest of the world.

Macro economic data from Europe was positive and continues to point towards sustained growth. The recent growth however has resulted in the appreciation of the Euro. This may have a negative impact on future export growth.

In Japan, the mid year raising of official interest rates from 0.00% to 0.25% has had a dramatic effect on Japanese growth. Economic growth slowed with consumer spending falling. Late in 2006 economic activity picked up. Although the Bank of Japan did not raise interest rates in their January meeting, there is an expectation that it is a matter of when rather than if.

The Japanese sharemarket was disappointing in 2006 returning 7.3%. Asian markets performed better with 28.2% for the year.

International equities continued to climb out of the mid 2006 correction with China in particular being an outstanding performer. China rose 15% in December alone, thanks to IPO’s and falling input costs for manufacturers. Global markets were also supported by strong Merger and Acquisition (M&A) activity. There was a 37.9% increase in merger activity in 2006 to $4.83 trillion. Most international sharemarkets finished 2006 with double digit returns for the year.

In Australia, GDP growth has slowed. The drought affected the rural sector in particular. Farm GDP is expected to fall 20% during this year. Employment growth has continued to keep our unemployment rate at a 30 year low of 4.6%. Strong employment is providing a boost for the consumer sector but is also providing some pressure on inflation. The Reserve Bank of Australia raised interest rates in November for the third time in 2006, to 6.25% in an attempt to get inflation down from the current 3.3% to the RBA target of 2-3%. It is unclear which way the RBA will act next.

Australian equites continued their upward climb into record territory with profit announcements kicking the market along. Merger and Acquisition (M&A) activity increased more than 50% during 2006. This together with positive corporate profit announcements and the positive influence of US markets helped the All Ordinaries. During 2006, the Australian sharemarket outperformed many markets in the world, gaining 24.5%.

Listed Property Trusts continued to perform strongly in the past quarter despite evidence of being overvalued.

Our outlook is for investment markets to remain positive but with perhaps more moderate returns than have been experienced over the past few years.

Brendan Gallagher

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The recent and proposed super changes are particularly attractive for those who can see the light of retirement at the end of the tunnel.

Seamus and Eileen O’Reilly aged 60 and 58 respectively are a case in point. Seamus and Eileen are both working fulltime and plan to retire in 2 years. Seamus receives an annual salary of $100,000 plus super of $9,000. Eileen earns a salary of $90,000 plus super of $8,100. Seamus has a super balance of $300,000 and Eileen has a balance of $270,000. Their current annual cost of living is $85,000.

The O’Reilly’s live in the family home which is now too large for their needs after the children have left. Prior to retirement they plan to sell their home for a net price after costs of $1.6 million and buy an apartment for $1.35 million leaving $250,000. They have an investment property worth $450,000 which they hold jointly with an accrued capital gain of $100,000. They have cash deposits of $50,000.

Here is one scenario for the O’Reilly’s to consider.

Shift wealth into the superannuation environment

Seamus and Eileen sell the family home and purchase their apartment leaving $250,000. They want to sell the investment property and transfer the proceeds into their super fund but prefer to wait until the 2007/2008 financial year as the tax costs will be mitigated through their salary sacrifice strategy in that year. (Explained below). But if they wait they will miss the $1 million moratorium that ends on 1 July 2007.

They borrow $450,000 and add this to the $250,000 giving them a total of $700,000 of available funds. They contribute $350,000 each to their super funds as a Non-Concessional (Undeducted) contribution before 1 July 2007. There will be no contributions tax payable on this contribution. It enters the super fund tax free.

Salary Sacrifice

On 1 March 2007 Seamus and Eileen renegotiate their salary packages. Seamus sacrifices $90,000 p.a. of his salary into super leaving $10,000 p.a. of taxable salary. Eileen sacrifices $80,000 p.a. of her salary into super leaving her with a taxable salary of $10,000 p.a. For the remainder of the financial year the O’Reilly’s will pro-rata the amount of salary sacrifice and remaining salary. They will meet the cashflow shortfall that arises from the reduced salary until July 2007 by drawing down on their cash account.

On 1 July 2007 Seamus commences a Transition to Retirement (TTR) Pension drawing a tax free pension income of $65,000. This combined with their reduced salary is sufficient to meet their ongoing living costs.

Sell the Investment Property

In July of 2007 they sell the investment property and repay the $450,000 loan. The capital gains of $50,000 each is reduced by 50% as they have held the property for over 12 months. This leaves a taxable gain of $25,000 each which, because of the salary sacrifice arrangements, is taxed at a lower marginal rate.

Outcome

• Seamus and Eileen have transferred $700,000 into their superannuation funds before the moratorium end date.
• In addition they have added a further $340,000 through salary sacrifice.
• In commencing a TTR pension, Seamus has converted his $650,000 super account to a tax free pension account saving at least $7,000 in tax annually. When they retire Seamus can reduce his pension payments and Eileen can start her pension thereby converting her fund into a tax free pension account. Alternatively she could draw a pension now and recontribute the excess cash.
• In the 2008/2009 financial year income tax assessed to Seamus and Eileen would be nil.
• Over 2 years they have saved $66,500 in income tax.
• On retirement they have approximately $1.5 million in super invested tax free in a portfolio of their choosing with full and free access to the capital and income free of tax.

The following tables show the tax saving in the 2008 and 2009 financial years assuming investment property is sold in 2007/08 year.

There are many variations on the strategy outlined and clearly it’s complex. So get the advice before you take any action. Call us now 02 92 333 888

Andrew Condell

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