1. Make a large undeducted contribution to super
This is the strategy being most widely used at the moment to help boost super and is important for a number of reasons.
Firstly, it will be the last opportunity for many investors to make a large one-off contribution into super.
Until June 30, eligible investors can contribute up to $1 million post-tax into their super. (Anything over $1 million will be taxed at the highest rate of 46.5 per cent.)
From July 1, this window closes and from then on investors will be limited to annual contributions of $150,000 or $450,000 averaged over three years.
An increased undeducted component also has the ability to increase a client’s pre-1983 component. With this crystallising into tax-free components on June 30, this can mean:
~ larger deductible, tax-free amounts in pensions drawn before age 60; and
~ greater estate planning and death benefit planning from superannuation in the future.
It’s also important to consider any opportunities for clients who were aged 64 or 74 between May 9 and September 5, 2006, who can still contribute up to $1 million as a result of transition relief issued on February 7, 2007.
2. Find lost super and consolidate the funds
Increasing the pre-1983 component of your clients’ super accounts can greatly benefit them in a number of ways. One of the most effective methods to do this is to amalgamate super accounts, with the earliest start date applying to the consolidated amount.
If amalgamation is not possible (eg, because a client is part of an employer fund or insurance needs to be preserved within certain funds), then consider rolling over at least part of the fund with the earlier start date into another fund. If ‘fund A’ has a pre-1983 service date, rolling over just $1 from ‘fund A’ to ‘fund B’ will provide ‘fund B’ with the same service date.
It’s also worthwhile asking clients if it’s possible that they may have any lost super funds. Such accounts will typically be old and small and may have pre-1983 service dates. They can be rolled into larger current accounts before June 30 with great benefit to some clients.
3. Negotiate an employment termination payment
If a client’s departure from a job is imminent, or on the cards, it will be much better to receive a large employment termination payment (ETP) before June 30, than after.
There is currently no limit for ETPs being rolled into super. The post-1983 component of the ETP is taxed in the fund at 15 per cent and does not count towards the concessional contributions cap.
From July 1, clients will no longer be able to roll ETPs into super unless they were ‘transitional termination payments’ — requiring an entitlement to a determinable amount under a written employment contract in place on May 9, 2006.
4. Take advantage of multiple MDC limits
The current financial year is the last time clients can take advantage of multiple Maximum Deductible Contribution (MDC) limits.
Whereas the MDC limits are currently levied on the entity making the contribution, from July 1 the new concessional contribution caps will be applied on a ‘per individual’ basis.
This means that 2006-07 is the last year for the following common strategies:
~ receiving employer contributions up to the MDC limit from each non-associated employer; and
~ salary sacrificing such that a client’s employment income is less than 10 per cent of their total assessable income, allowing a personal deductible contribution to be made against a fresh MDC limit. The sale of an investment property is a common feature in this strategy.
5. Transferring overseas super
When a super benefit is transferred from an overseas fund more than six months after a person becomes an Australian tax resident, a tax liability arises in respect of the growth of the overseas fund during the time of residency.
When the benefit is transferred to an Australian fund, the member can elect to have the taxable amount treated as a taxable contribution, incurring 15 per cent tax.
The taxable amount won’t count towards the concessional contributions cap, however the remainder of the transfer will be regarded as a non-concessional contribution and count against the non-concessional cap. Prior to July 1, this cap is $1 million, but after that, the lower caps will make overseas transfers much harder.
Transferring an overseas super benefit to Australia ultimately benefits the client in the form of tax-free super after age 60. But this applies only to payments from Australian super funds, so if a pension is drawn from overseas it may well be taxable.
In order to elect to have the taxable part of the transfer treated as a taxable contribution to the Australian fund, as opposed to included in the client’s assessable income, none of the overseas super benefit can remain in that overseas fund.
If the benefit is transferred after June 30, the non-concessional cap of $150,000 per year, or $450,000 over three years, will effectively restrict the amount that can be transferred to Australia, making it hard to meet this requirement.
6. Rollover large balances from untaxed schemes
If an untaxed scheme is rolled over into a taxed scheme, the post-83 untaxed component is currently taxed at 15 per cent. The remaining amount becomes a post-83 taxed component in the new fund.
From July 1, rollovers from untaxed to taxed funds where the untaxed element exceeds $1 million will be taxed in the originating fund at 46.5 per cent. The amount up to $1 million will continue to be taxed at 15 per cent.
This $1 million cap will also apply to lump sum withdrawals from untaxed schemes.
Clients with untaxed balances exceeding $1 million may wish to consider rolling their benefit to a taxed fund before June 30. The strategy is especially important where the untaxed fund does not offer untaxed pensions, meaning the client will at some stage be forced to roll the benefit out, or take a lump sum, at some future date.
7. Withdrawal re-contribution
There are a number of issues to consider around the timing of a withdrawal re-contribution strategy, as the mechanics of this strategy and its consequences differ greatly from July 1. And even though lump sums and pensions are tax-free for people over 60 from July 1, 2007, there are still two reasons you may want to do it:
1. From age 55 to 59 pensions are not tax-free, so a re-contribution strategy can significantly increase the deductible, that is, tax free, amount.
2. From July 1, non-dependants, such as adult children, will only be able to receive a death benefit as a lump sum. Creating a higher tax-free component in super will significantly reduce ETP tax to a non-dependant on death.
From July 1, account balances will be split into a taxable and tax-free component. All lump sum withdrawals will be proportionate between these components. You will not be able to select the components for withdrawal.
The case study (please see Money Management Magazine April 5, 2007 page 40) considers the difference between using this strategy now and using it after July 1.
Bryan Ashenden is the head of technical consulting at Asgard Wealth Solutions .
