Understanding Superannuation and Superannuation contributions

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1 Understanding Superannuation and Superannuation contributions September 2009 Superannuation is an investment vehicle designed to assist Australians in saving for their retirement. The Government encourages saving through superannuation by providing generous tax incentives for contributions, during investment, and in retirement. The following information on superannuation will provide you with details on how superannuation may allow you to accumulate your required nest egg for retirement. Contributions Contributions to superannuation can be made in the following circumstances: If you are under age 65 you may make personal contributions to superannuation on your own behalf; You may make contributions to superannuation on behalf of your spouse if he or she is under 65 years of age; If you are years of age you may contribute to superannuation if you have worked for at least 40 hours in a period of 30 consecutive days in the current financial year. Your spouse may contribute on your behalf if you meet these criteria; If you are years of age, you may contribute to superannuation if you have worked for at least 40 hours in 30 consecutive days in the current financial year. Your spouse may not contribute on your behalf; Your employer may also be required to or may choose to contribute on your behalf. If you are over age 75 you are no longer eligible to contribute into superannuation, regardless of your working status. The cut off date for contributions is the 28th day of the month following your 75th birthday. However, employer contributions may be accepted in limited circumstances. Concessional contributions Tax deductible (concessional) superannuation contributions may be made by employers on behalf of their employees (including salary sacrificed contributions) and by persons who are defined as substantially self employed or unsupported. Tax deductible contributions can only be made to superannuation funds which comply with Government regulations. If eligible, concessional contributions are generally used to reduce tax payable or to offset a Capital Gains Tax liability. Concessional contributions are subject to 15% contributions tax, payable by the superannuation fund. The Government has set limits on the amount of concessional contributions which can be made for individuals by an employer, or by an eligible person for themselves, in any one financial year. An eligible person includes someone who is not in employment or is self employed and is therefore unsupported. These contributions are detailed below. Employer Superannuation Contributions Employers are required to make superannuation contributions on behalf of their employees under the Superannuation Guarantee (SG) scheme. They may also offer facilities by which employees may sacrifice a portion of their pre-tax income in exchange for increased concessional superannuation contributions. This is known as salary sacrifice. There is no limit to the amount of concessional contributions allowed to be contributed to superannuation; however, contributions over specified limits will be taxed at the highest marginal tax rate plus Medicare, with the tax liability levied on the individual. Additionally, any excess will be counted towards the non-concessional contributions limit (explained further on). The limit for the 2009/10 financial year is: $25,000 per annum $50,000 per annum transitional limit (this applies for those over age 50 until 30 June 2012) Superannuation Guarantee The SG system was introduced during the early 1990s. The SG payable by all employers (from 1 July 2003) is 9% of their employees earnings and must be paid quarterly. Employers are required to contribute only up to a maximum of $14,461 per annum for the 2009/10 year (9% of $160,680 known as the Maximum Contribution Base). An employer is not required to make superannuation contributions for employees who earn less than $450 per month. Superannuation contributions can be paid above these amounts, however the employer is not legally obliged to do so. It is important to note that these contributions count towards the Concessional Contribution limit. PAGE ONE

2 Understanding Superannuation and Salary Sacrifice Salary sacrifice is the portion of pre-tax salary that an employee gives up in exchange for additional contributions being made to superannuation for the employee by the employer. Salary sacrificed superannuation contributions are taxed at 15% on entry to the fund. This is generally a much lower rate than the individual s marginal tax rate, which can be as high as 46.5% (including Medicare levy). Through salary sacrifice an individual can therefore reduce their tax liability while building wealth for their retirement. It is important to note that these contributions count towards the Concessional Contribution limit. Self Employed/Eligible Persons Superannuation Contributions For those persons who are considered eligible persons, the Government offers generous tax concessions to encourage eligible people to save for their own retirement. This is because these people generally do not receive employer contributions under the Superannuation Guarantee scheme, and are not required to make superannuation contributions on their own behalf. A person who is considered to be substantially selfemployed is eligible for the same concessions. This applies if less than 10% of the assessable income they receive relates to employment as an employee. Income from an employer includes the value of grossed up fringe benefits and reportable employer super contributions (eg salary sacrifice and voluntary employer super contributions). To determine your eligibility to make a concessional contribution, consult with your financial planner or tax professional. Eligible persons are able to make concessional contributions and to claim a deduction for these contributions up to age 75. However, please also note that the contribution must be made before 28 days following the month after you reach age 75. There is no limit to the amount of concessional contributions allowed to be contributed to superannuation. However, contributions over specified limits will be taxed at the highest marginal tax rate plus Medicare, with the tax liability levied on the individual. The limit for the 2009/10 financial year is: $25,000 per annum $50,000 per annum transitional limit (this applies for those over age 50 until 30 June 2012) Non-concessional contributions In addition to concessional contributions made by an individual or employee, individuals can make personal contributions for which a deduction is not claimed. These are commonly known as nonconcessional contributions, and can attract special offsets, Government co-contributions and tax concessions in retirement. Non-Concessional Contributions Non-concessional contributions are superannuation contributions by an eligible individual where a tax deduction has not or cannot be claimed. An eligible person is anyone other than: An employer of the taxpayer A person who is associated with the employer and making the contributions under an agreement with the employer, or A person prohibited from making superannuation contributions due to their working status and/or age. Non-concessional contributions are superannuation contributions for which a tax deduction has not been claimed, and these contributions are not taxed when received by the superannuation fund. For the 2009/10 financial year, the maximum nonconcessionalcontribution that can be made is $150,000. For those under age 65, an averaging provision will apply allowing total contributions of $450,000 over three years. For persons aged 65 to 75, a contribution limit of $150,000 per annum is allowed, providing they meet the work test. To determine whether you meet the work test and are therefore eligible to make a contribution, consult with your financial planner or tax professional. The annual entitlement will operate on a use it or lose it basis; that is, if the cap is not fully utilised in any year, then the unused amount cannot be credited to a future year. The below table shows various combinations of how the cap may be applied: PAGE TWO Example 1 Maximum annual contribution Example 2 Maximum contribution using averaging $150,000 $450,000 $350, $150,000 $0 $ $150,000 $0 $100, $150,000 $150,000 $450,000 Example 3 Maximum contribution using averaging

3 Government co-contributions Under current legislation, you can make a non concessional superannuation contribution of $1,000, and a Government matched superannuation contribution of $1,000 (2009/10) may be available. A person is eligible to receive the government cocontribution, providing they have met the following requirements: have assessable income, reportable fringe benefits and reportable employer super contributions in the income year less than the upper income threshold (i.e. $61,920 for 2009/10); have made a personal superannuation contribution has earned at least 10% of their assessable income, reportable fringe benefits from employment or business income is not the holder of an eligible temporary resident visa is less than 71 years old at the end of the income year, and has lodged a tax return. The government co-contribution is available to self employed people providing they earn 10% or more of their income from carrying on a business, eligible employment, or combination of both. Once eligible, the income test determines the amount of co contribution you may receive. If your earnings (assessable income, reportable fringe benefits and reportable employer super contributions) are less than $31,920 in the year you make a personal contribution, the Government will contribute $1 for every $1 you contribute up to a maximum of $1,000. For earnings between $31,920 and $61,920, the $1,000 maximum is reduced by cents for every dollar earned over $31,920 until it cuts out altogether at $61,920. This means that for every $1 of personal contributions, the Government will contribute up to $1, up to the maximum contribution amount available for the person s income level. The lower income threshold is indexed annually to changes in AWOTE, with the upper threshold increased accordingly. Government co-contributions are not tax deductible and are not taxed when the superannuation fund receives them. You do not need to apply for the Government co-contribution. The ATO automatically calculates whether you are entitled to it, using information from your superannuation fund and your tax return. The Government co-contribution is paid as a non-concessional contribution and it is paid directly into the same superannuation fund to which you made your personal contribution. Spouse Contribution A superannuation member may make nonconcessional contributions into superannuation on behalf of his/her spouse as long as their spouse is under age 65. This is regardless of whether the spouse is working; however, from the ages of the receiving spouse must meet the work test. The nonconcessional contributions limit applies to the receiving spouse. To receive a spouse contribution, the following restrictions apply: Your spouse must be either a legal or de facto husband or wife You and your spouse must be living together You and your spouse must be Australian residents when the contribution is made You must be under age 65 or eligible to contribute to superannuation Your spouse may not claim the contribution as a tax deduction (in other words, it must be a non concessional contribution for your spouse) and The contribution must be made from your spouse s account or a jointly held account. Once spouse contributions are put into superannuation, they are preserved. This means they can t be withdrawn until the receiving spouse meets a condition of release (turn 65 or retire between 55 and 65). Spouse Superannuation Contribution Rebate A taxpayer who makes a contribution to superannuation on behalf of his/her low-income earning spouse may be eligible for a tax rebate within certain limits. Low-income earning for purposes of the rebate is where the spouse has assessable income of less than $13,800 per annum plus reportable fringe benefits. A spouse is defined as either a legal or a de facto husband or wife, although they need to be living together for the contributing spouse to claim the rebate. The maximum rebate is 18% of the eligible spouse contributions, up to a maximum of $3,000 in contributions (i.e. a rebate of $540). The maximum rebate applies where the recipient spouse has assessable income of less than $10,800 per annum. Assessable income in excess of this amount reduces the maximum rebateable contributions at the rate of $1 for every $1 in excess of assessable income above $10,800 up to the $13,800 limit. PAGE THREE

4 Further conditions for the rebate to apply are that both partners must be Australian residents at the time of contribution and the contributing spouse may not claim the contribution as a tax deduction. Spouse contributions are treated as nonconcessional contributions and are preserved. Preservation is discussed next. Preservation Whilst superannuation is extremely important in an individual s overall retirement planning, it must be remembered that Government legislation restricts access to superannuation money (including nonconcessional contributions) until an individual meets a condition of release. These conditions include: age 65 retirement from the workforce after reaching preservation age (see below) transition to retirement after reaching preservation age (see below) ceasing current employment arrangement after age 60 death total and permanent disablement terminal medical condition permanent departure from Australia for Eligible Temporary Residents severe financial hardship compassionate grounds. Preservation is designed to ensure that superannuation benefits are used only for retirement. Date of Birth Before 1 July July June Years 1 July June Years 1 July June Years 55 Years 1 July June Years After30 June Years Accessing your superannuation benefits Once you have met a condition of release, you may retain your funds in superannuation, withdraw them from the superannuation environment, or commence a retirement income stream. The tax and social security implications of these options differ significantly. Under this scheme it is possible for people who Under this scheme it is possible for people who have reached their superannuation preservation have reached their superannuation preservation age to access benefits in the form of a noncashable income stream before permanent age to access benefits in the form of a noncashable income stream before permanent retirement from the workforce. retirement from the workforce. For further information on non-commutable income streams, see Understanding Account Based Pensions or speak with your adviser. Taking your Superannuation as a Lump Sum The tax-free component of a superannuation benefit is generally made up of non-concessional contributions. The taxable component of a superannuation benefit is the total value of the superannuation benefit less the tax free component. The taxable component is generally made up of concessional contributions made as well as earnings. Upon withdrawal of funds, the following taxation implications will apply for 2009/10: Tax Free Taxable Below Preservation age to age 59 Age 60 & Over Tax Free Tax Free Tax Free 20% Plus Medicare First $150,000 tax free >$150,000 15% plus medicare Tax Free Superannuation Income Streams The main type of superannuation income stream is an allocated pension. Allocated pensions provide a flexible and tax-effective method of generating income in retirement. Earnings and capital gains within an allocated pension are tax free. Pension payments may be taxable in the hands of the recipient (unless the recipient is over 60 years of age); however, subject to individual circumstances, recipients under age 60 may be eligible to claim a tax-free amount, as well as a 15% rebate on the taxable portion of the payment. Transition to Retirement Option Transition to Retirement is a Government initiative aimed at encouraging longer workforce participation by offering incentives to older workers. PAGE FOUR

5 Death Benefits and Taxation Implications The tax payable on death benefits depends on your age when you die and/or whether your beneficiary is a dependant (as defined under Tax Legislation). The following table shows the tax consequences of a superannuation death benefit (please note that the tax free component is received tax free in all circumstances): Beneficiary 15% tax rebate on the taxable income. Important note The information contained in this document dated 21st July 2009 has been given in good faith and has been derived from laws current at this date and our interpretation of them. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice. This document is to be used as general information only and should not be considered a comprehensive statement on any matter and should not be relied upon as such. This document has been prepared without taking into account any individual objectives, financial situation or needs. Before acting on this information you should consider the appropriateness having regard to your own objectives, financial situation and needs. No member of Capital Managers or any of their employees or directors gives any warranty of accuracy or reliability nor accepts any liability in any other way, including by reason of negligence for any errors or omissions contained herein, to the extent permitted by law. This document may not be used or reproduced without the prior consent of Capital Managers Capital Managers Pty Ltd trading as Capital Managers Authorised representative No is an Authorised Representative of Guardianfp Ltd trading as Guardian Financial Planning ABN AFSL No PAGE FIVE Tax implications for death benefits Death Benefit taken as an income stream Deceased and/or dependant is over 60 Death Benefit taken as a lump sum Deceased and Dependant both under 60 Dependant Tax Free Tax Free Assessable income (15% tax rebate applies to taxable income). A tax-free amount may also apply Non-Dependant Taxed up to 30% plus medicare Advantages of superannuation The tax effectiveness of superannuation makes it a preferred investment strategy. In summary, the advantages are: Superannuation funds earnings are taxed at a maximum rate of 15% (10% for crystallised capital gains on assets held for at least 12 months). Additionally, income tax of 15% may be offset in part by imputation credits derived from Australian equity-based investments within the fund. Insurance premiums within superannuation also have the potential to reduce tax payable within the fund. Individuals may be able to claim a tax deduction for contributions, a tax offset or co-contribution. There are no personal income tax implications from the returns earned by superannuation funds as no income is distributed. By rolling over superannuation funds rather than cashing out, the payment of lump sum tax can be deferred and possibly eliminated. For those persons over 60 years of age, withdrawals from superannuation, either as income or a lump sum are tax free. For persons under 60 years of age, income received from a superannuation retirement income stream may receive concessional tax treatment possibly including a tax-free amount and a Non-dependents are not entitled to an income stream death benefit Superannuation in the accumulation phase is not counted under the Centrelink Assets Test or Income Test for persons under age pension age. Risks of superannuation Liquidity Risk A risk associated with superannuation is that monies invested may not be easily liquidated, or cashed in when you require access to your funds until one of the release conditions have been met. These release conditions are outlined in the Product Disclosure Statement and are also mentioned briefly earlier on in this document. Regulatory Risk A potential risk associated with superannuation is that of regulatory risk. A change of Government or change in government policy could bring about changes to the existing superannuation laws which could impact on issues such as taxation, preservation and reporting requirements. Strategy Risk Strategy risk is the risk that an investment strategy may not continue to be appropriate for you following the impact of legislative changes on your financial circumstances or objectives. This is why you should review your portfolio regularly.