Superannuation

Superannuation is a form of long-term saving to provide retirees with a pension or lump sum in retirement. As an incentive the Australian Government provides tax concessions to people that save for retirement via the Superannuation system. The most important concession is that superannuation can now be withdrawn tax free after the age of 60 whether by lump sum or by pension.

The underlying performance of your superannuation is driven like any other asset and possible investments in superannuation include cash, fixed interest, shares and property. It is important that you pay attention to your superannuation investments to ensure that you have structure and control over your financial position.

Eligibility to contribute to Superannuation:

Anyone under age 65 may contribute to superannuation. From age 65 the super fund member must have been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which the contribution is made. You cannot make contributions to superannuation after age 75.

Superannuation Tax Concession:

Earnings in superannuation funds are taxed at a rate of 15% rather than your marginal tax rate plus the Medicare levy;
Capital gains are taxed at 10% provided the asset has been held by the superannuation fund for more than a year.
Superannuation funds may be converted into a tax free income stream upon retirement, such as an Account Based Pension.
Withdrawals may be made tax free after age 60 with no maximum withdrawal.

Employer Contributions

Employer contributions to an eligible superannuation fund on behalf of employees are fully tax deductible to the employer up to the cap which is $50,000 per annum for the bulk of employees.

The cap is $100,000 for super fund members over the age of 50 at the 30th June. This concession lasts until the 30th June 2012.

Contributions Tax of 15% is payable on the contribution by the superannuation fund.

Salary Sacrifice Contributions

Salary sacrifice means foregoing wage income and contributing the funds to superannuation instead. This additional contribution is over and above the minimum 9% that the employer is required to contribute and comes directly from the employees’ pay – it is not an addition to the employee’s salary.

This strategy provides employees with an excellent opportunity to make tax-effective superannuation contributions when comparing the marginal tax rates with the superannuation entry tax rate of 15%.

Non-Concessional Contributions

Non Concessional contributions used to be referred to as undeducted contributions and mean that post tax contributions are made. No tax deduction is claimed and no tax is incurred in the superannuation fund.

There is a cap of $150,000 for non concessional contributions. You can also take advantage of the bring forward provisions which allow you to contribute $450,000 in any one year provided you do not make any contribution for the following two years.

Preservation of Superannuation monies

All superannuation contributions made after July 1, 1999 and fund earnings accrued after July 1, 1999 will be subject to “preservation” until preservation age, except in limited circumstances. Benefits that were not preserved as at 1 July 1999 will remain non-preserved.

The Preservation rules restrict persons from accessing their superannuation monies where certain rules are not satisfied such as age restrictions.

The current Preservation Age is 55, however there is a phased increase in preservation from age 55 to age 60 by the year 2025 as shown in the table below:

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
After 30 June 1964	60

The taxation implications of withdrawing funds prior to age 60 may impact your retirement objectives as tax may be payable.

Accessing your Superannuation

When you decide to retire and draw on your superannuation there are four main ways to draw your superannuation.

Lump sum.
Account Based Pension. (formerly allocated pension).
Transition to Retirement Pension.
Annuity.

A lump sum is simply cashing your superannuation and paying lump sum tax (if applicable) in your own name. There is no tax payable on superannuation withdrawals made after age 60. Although no tax is payable this is usually not tax effective in the long term, as after you cash your superannuation you will need to invest the funds in your own name. You will then pay tax on the interest and dividends that you earn. However cashing in your superannuation may make sense if you have outstanding debt and can you use your super to pay off the debt. If you are under age 60 at the time of withdrawal the tax you will pay on lump sum withdrawal depends on the different components you have in superannuation.

An account based pension is the most flexible method of drawing an income from superannuation. Under an allocated pension structure your superannuation investments can remain exactly as they were before retirement, instead of contributing to your superannuation you now draw an income from it. The pension drawn must be paid at least once a year and must be within prescribed minimum limits.

Once your superannuation fund converts to an account based pension there is no tax payable within the pension itself and no tax payable on the pension drawn after age 60. (Tax may be payable on the pension that you draw under age 60). The fund pays nil tax on the income it earns. In fact the fund may be entitled to a refund if it receives franked dividend income from managed funds. Partial lump sum withdrawals may be made at any time and your pension may be wound up at any time.

A Transition to Retirement (TTR) Pension as the name suggests is used while nearing retirement. It has many of the benefits of an account based pension, any pension paid after age sixty is tax free and the funds within the pension account do not pay any tax. TTR can be extremely tax effective when combined with a salary sacrifice strategy. Please contact our office for more information.

An annuity involves the purchase of a capital sum with the capital and interest paid back to you over the term of an annuity. An annuity provides certainty with retirement planning and is a secure alternative for conservative investors.

The 2009 Budget Update

The pre budget speculation that the transition to retirement condition of release would be removed did not eventuate. However, concessional contribution caps were reduced and a temporary reduction in the matching government co-contribution will occur.

Reducing the concessional contributions caps

The Government has announced a proposed reduction to the contribution caps effective from the 2009-2010 financial year. The reductions are as follows:

The concessional contributions cap will be reduced to $25,000 per annum (indexed), with effect from the 2009/10 financial year.
The transitional concessional contributions cap (applicable to individuals aged 50 and over for the 2009/10, 2010/11 and 2011/12 financial years) will be reduced to $50,000 per annum.
'Grandfathering' arrangements will apply to certain members with defined benefit interests as at 12 May 2009 whose notional taxed contributions would otherwise exceed the reduced cap.
The current cap on non-concessional contributions is $150,000 per annum (2008/09 financial year) and will remain at that level in 2009/10. In the future, the cap will be calculated as six times the level of the (indexed) concessional contributions cap.

Temporarily reducing the Government co-contribution

The Government will temporarily reduce the matching rate and maximum co-contribution that is payable on an individual's eligible personal non-concessional superannuation contributions, with effect to contributions made from 1 July 2009. Under this measure, the matching rate will be:

100 per cent for 2009/10, 2010/11 and 2011/12, with a maximum co-contribution of $1,000, reduced by 3.333 cents for each dollar by which the person's total income exceeds the shade out threshold for receiving the full co-contribution;
125 per cent for 2012/13 and 2013/14, with a maximum co-contribution of $1,250, reduced by 4.167 cents for each dollar of total income above the shade out threshold; and
150 per cent from 2014/15 onwards, with a maximum co-contribution of $1,500, reduced by 5 cents for each dollar of total income above the shade out threshold.

Account based pensions — extended drawdown relief for income streams

The Government will extend the pension drawdown relief provided by the Government for 2008/09 financial year and will continue to halve the minimum payment amounts for account based and market linked (term allocated) income streams for the 2009/10 financial year.

Trans-Tasman retirement savings portability scheme

The Government has agreed in principle to the signing of a memorandum of understanding with New Zealand to establish a Trans-Tasman retirement savings portability scheme.

The portability scheme will permit transfers of superannuation savings between certain Australian superannuation funds and New Zealand KiwiSaver funds.

The scheme will have effect from a date which will be set in accordance with the memorandum of understanding. The final details of the scheme are currently being settled with New Zealand.

Release of the Australia's Future Tax System Report into Retirement Incomes

The Government released the Australia's Future Tax System (Henry Review) Report on the retirement income system.

The report recommended amongst other things the following items:

Australia's three-pillar retirement income system (means tested Age Pension, compulsory saving through the Superannuation Guarantee and voluntary saving for retirement) should be retained,
tax-assisted voluntary superannuation contributions should be more fairly distributed, and questioned whether the current cap on the concessions was appropriate. This was partially implemented in this budget,
the preservation age for superannuation should be gradually increased to 67 years,
the current superannuation guarantee should be retained at 9 per cent.

The Panel has deferred final recommendations on other issues until the December 2009 report to enable consideration in the context of the broader tax-transfer system.

David McManus Financial Adviser Based In Kew d.macmanus@ethosfinancial.com.au 0424 61 60 60 CFP DFP Certified Financial Planner Insurance Superannuation Retirement Planning Pension Centrelink Aged Care Income Protection

David Mac Manus Financial Adviser Based In Kew d.macmanus@ethosfinancial.com.au 0424 61 60 60 CFP DFP Certified Financial Planner Insurance Superannuation Retirement Planning Pension Centrelink Aged Care Income Protection

David MacManus Financial Adviser Based In Kew d.macmanus@ethosfinancial.com.au 0424 61 60 60 CFP DFP Certified Financial Planner Insurance Superannuation Retirement Planning Pension Centrelink Aged Care Income Protection

David Mc Manus Financial Adviser Based In Kew d.macmanus@ethosfinancial.com.au 0424 61 60 60 CFP DFP Certified Financial Planner Insurance Superannuation Retirement Planning Pension Centrelink Aged Care Income Protection