How misinformation is leading people to make the wrong super decisions

It’s hard to avoid the hype about superannuation at the moment with a myriad of advertising and news articles telling you to invest in superannuation before the 30 June deadline. This month, we’ve devoted this issue to giving you the facts about the incoming superannuation changes so you can make an informed decision about what steps to take.

What is going to change?

 

From 1 July, the way superannuation is taxed and much of the complexity of the existing system will be removed.

Concessional contributions - generally contributions from your employer - to your superannuation fund are taxed at 15% on entry to your fund. Non-concessional contributions – generally contributions you make yourself – are not taxed on the way into the fund. From 1 July 2007, superannuation benefits paid as either a lump sum or a pension will be tax free for those over 60 years of age (if from a taxed fund).

What is the 30 June opportunity?

From 1 July this year, a limit of $150,000 per financial year applies to undeducted contributions. For those under 65, this limit is averaged across 3 years allowing you to bring forward 3 years worth of contributions ($450,000) into one year if you choose. For example, you might choose to make a $450,000 contribution on 5 July 2008 but then not make another contribution until the 2011/2012 financial year.

Any contributions above the non-concessional threshold are taxed at the top marginal tax rate of 46.5% in your hands (the fund can pay this tax).

Transitional rules allow you to make a contribution of up to $1 million between 10 May 2006 and 30 June 2007 before the restrictive limits apply. So, if there is a benefit to you bulking up your superannuation before the more restrictive limits come into force on 1 July, now is the time to do it. As superannuation is not taxed when you withdraw it under the new rules (assuming you are 60 or more from a taxed fund), superannuation is an attractive investment vehicle. By comparison, if you were to put the money into a different investment vehicle, any income you generate from the investment would be taxed as income at your marginal tax rate. In super, your investment can grow and any gain is potentially tax free.

The transitional undeducted contribution limit is available to all taxpayers eligible to contribute to superannuation at the time of contributing.

I’m thinking about borrowing cash to put into super

Be aware that if you borrow say $1 million to put into super the interest on the loan is not deductible. As a result, you need to look at the cost of borrowing the cash (including application fees, legal fees and any valuation necessary if you are using the equity in your home) against the tax benefits offered by the super changes. For many, the cost of the loan over time with no ability to claim a tax deduction is not worth it. On top of that, the cash you borrow does not produce any income.

 

It’s important to look at the reasons why you are borrowing the cash. It might be that you intend to sell an investment property but in the current market you do not expect to sell the property prior to 30 June. In these circumstances, it might be worth borrowing the cash to invest in super and then repaying the debt once the property is sold. If the borrowings can be met and the strategy remains viable, then borrowing makes sense.

I have a SMSF, what assets can I transfer into it?

 

All superannuation funds need to comply with the Superannuation Industry Supervision (SIS) Act. Under the Act, property transferred into a superannuation fund needs to be at arm’s length; excluding you from transferring assets such as residential investment property that you own into the fund. The exception to this is Business Real Property defined under Section 66; this generally includes commercial property. Outside of this, it is also possible to transfer shares held on an approved stock exchange into your super fund. Just be aware however that transferring these assets into your superannuation fund may incur stamp duty and potentially trigger Capital Gains Tax.

Where the asset is being transferred from the employer to the employee (for example, if you are a working Director in your own company, the company can make a contribution of property, such as a building, to your SMSF) the company can claim a tax deduction but the transfer is also likely to incur Fringe Benefits Tax.

 

Interestingly, from 1 July the rules for non-cash contributions will change. In specie contributions (for practical purposes this means contributions of business real property or listed shares) made by an employer to a SMSF will no longer attract FBT while the company can still claim a tax deduction.

Legislative changes remove this impediment to ensure that there is no distinction between different types of contributions.

Just be aware that the market value of the building is likely to breach your contribution limit and will be taxed at 31.5% plus the 15% paid on the way into the fund.

You are also able to make in specie undeducted contributions to your SMSF.

Don’t forget that you also need to keep your SMSF trust deed up to date. If your deed does not accommodate the new super changes, you cannot act on them.

I’m self employed, what do the changes mean for me?

From 1 July, the self employed are eligible to claim a full deduction for the contributions they make to superannuation until age 75. This replaces the old rules where a full tax deduction applied to the first $5,000 contributed and 75% thereafter.

Be aware however that if you are a contractor, you might not be able to access a tax deduction for your superannuation contributions. Under the superannuation guarantee laws, if you are paid for your personal labour or skills, perform the work personally (not delegated), and you are not paid to achieve a result (for example, the contract is based on your time), you are considered to be an employee not a business. As a result, any contributions you make are not deductible as the hirer should be making a superannuation guarantee contribution on your behalf (unless you meet the definition of an ‘eligible person’) under SIS.

To be considered ‘substantially self employed’ and therefore eligible to claim a tax deduction for super contributions, less than 10% of your assessable income including reportable fringe benefits will be from employment. It’s important to note that this rule applies on a financial year basis. So, if you were employed for any part of the year, you might fail the test.

How soon can I access my super?

Firstly, it is no longer compulsory to cash out your super. Currently, subject to the work test, you are forced to take your super at age 65 if you are not working and age 75 if you are working. From 10 May 2006, once you reach your preservation age or age 65, and assuming you meet the conditions of release, you decide when to take your super; giving you the option of leaving your super in place if you choose to.

The new rules do not change the age that you can access your super. That is, you cannot access your superannuation until you reach your preservation age. If you were born before 1 July 1960, you preservation age is 55 years of age. The preservation age increases for each year until 30 June 1964 when the preservation age is 60 years of age.

As a result, channelling income into superannuation might only be worthwhile, regardless of the tax benefits, if you are within reach of retirement age or the cash you are putting into super is surplus to your requirements. Superannuation is an illiquid investment unlike other investments that you can cash out. Once it’s invested it can’t be touched until preservation age.

How long can I keep contributing to super?

 

Your employer can keep making deductible contributions to your fund up until age 75.

From 1 July 2007, once you turn 65, you will be able to make $150,000 of post tax contributions each financial year as long as you still meet the work test (working 40 hours in a continuous 30 day period). Once you reach 75 however, you cannot make any further contributions.

It’s important not to be pushed into any quick superannuation decisions and that the decisions you make to capitalise on the June 30 deadline are in line with your investment strategy. On top of that, as superannuation interlinks with the tax law, you need to be aware of both the investment benefits and any potential tax implications. Talk to us on (03) 9622 0600 today to assist before you act.