Strategy opportunities up to 30 June 2007
Last chance opportunities
The changes proposed in the 2006 Federal Budget mean that the period up to 1 July 2007 will offer a final opportunity for some of the existing superannuation strategies to be implemented.
Basically, in a post-superannuation reform environment, the pendulum will swing from capping the amount you are able to accumulate in super (measured at retirement), to capping the amount you are able to contribute to your super fund each year.
The proposed elimination of Reasonable Benefit Limits (RBLs) means that you can now have as much money as you want in super and, once you turn 60, it will be tax-free upon withdrawal. The Government has proposed to cap the amount you can contribute each year, so you will need to adopt a steady-as-she-goes contribution strategy, rather than shovelling money in during your last few years in the workforce, as is the current trend.
The proposed changes also mean some strategies will no longer be available in years to come. However, as most changes will not take effect until 1 July 2007, opportunities remain in the current financial year.
Final year to claim your double deductions
This is the last year in which you can claim multiple sets of age-based deductible contributions.
Currently, you can salary sacrifice pre-tax income up to $42,385 a year if you are aged 35 to 49, and $105,113 if you are over 50. If you work for more than one employer, they can each make salary-sacrificed contributions on your behalf up to your age-based limit.
From 1 July next year, the maximum amount that you will be able to salary sacrifice before being taxed at the top marginal tax rate will be a flat $50,000 per year (or $100,000 for the next 5 years if you are over 50), no matter how many employers you have.
By taking advantage of the current rules this year, you may be able to salary sacrifice over $200,000 of your pre-tax salary into super. And given there will be no tax payable on this money once you reach 60, it makes sense to put as much money into super as possible.
Undeducted contributions
When it comes to undeducted contributions, a new transitional cap of $1 million will apply to undeducted contributions made between Budget night (9 May 2006) and 30 June 2007. A maximum undeducted contribution limit of $150,000 a year will apply from the start of the 2007-08 financial year.
From 1 July next year, you will also be able to make a $450,000 undeducted contribution and average that out over a 3-year period as long as you are below 65 years of age.
Consider bringing your eligible termination payment (ETP) forward
If you are likely to receive an eligible termination payment (ETP) from your employer after 1 July 2007, there may be some advantage in bringing your payment forward into this financial year. After 1 July 2007, you will not be able to roll over your employer ETP into your super fund, but will have to take it as a lump sum and pay tax.
If you wait until after 1 July 2007, assuming the Budget proposals are adopted, you will no longer have the option of rolling it over. You will be forced to receive it as a cash payment and will be liable for the appropriate amount of lump sum tax, which could reach up to 46.5%.
If, however, you had an existing contract as at Budget night stating your entitlement to an employer ETP, you will receive a transitional tax treatment up until 1 July 2012. Transitional rules will allow you to still roll over your ETP into super and will limit tax on amounts between $140,000 and $1 million to a maximum of 30%.
In some cases, there is a strong argument to rollover an employer ETP and delay accessing your super until you are at least 60, which was a key part of the Government's intention. However, if you choose to retire ahead of your 60th birthday during this current year, you will still be able to enjoy some tax concessions, notably you can draw down a lump sum up to $135,590 from your post-June 1983 component tax-free.