As we close in on the end of another tax year, it is worth considering your superannuation position in terms of concessional and non-concessional contributions, pension strategies, minimum pension requirements and other related superannuation issues.
Superannuation Contribution Limits
The concessional contributions cap for the year ending 30 June 2013 is $25,000 for all individuals.
Non-concessional contributions cap remains at $150,000 per annum (subject to the “bring forward” rule for individuals under 65 years of age).
Additional tax will apply to any excess contributions to bring the total tax liability to the highest marginal tax rate plus Medicare Levy of 46.5%.
For concessional contributions made from 1 July 2013, the Government confirmed that it will introduce legislation to allow for excess concessional contributions to be withdrawn without penalty. This means that excess concessional contributions, if withdrawn, will be taxed at your marginal tax rate plus Medicare Levy and a general interest charge rather than the highest marginal tax rate plus Medicare Levy.
If self-employed or have no other income except for investment earnings greater than $20,542, consider making a concessional contribution up to $25,000 subject to eligibility rules.
Superannuation Government Co-Contributions
If you are under 71 years of age at the end of the financial year, you may qualify for the government co-contribution by making a non-concessional contribution to your super subject to you satisfying a work test and income test.
To satisfy the work test, you must earn 10% or more of your income from eligible employment-related activities, carrying on a business or a combination of both.
In addition, if you are aged 65 or over, you must also be gainfully employed for at least 40 hours in a 30 consecutive days period in the financial year the contribution is made.
Under the scheme, if your income is below $31,920 for the 2012-13 financial year, you will receive $0.50 for each dollar of contribution up to $500 from the Federal Government.
If your income is over $31,920 but below $46,920, you will receive a pro-rata co-contribution. Your entitlement is reduced by 3.33 cents for every dollar you earn over $31,920.
It is important to note that for the purpose of the income test, your total income includes your assessable income, reportable fringe benefits and reportable employer super contributions less any allowable business deductions.
Spouse Super Contribution Tax Offset
If you make a non-concessional contribution on behalf of your non-working or low-income-earning spouse, you may be entitled to an 18% tax offset on the first $3,000 of contributions. The maximum tax offset is $540.
To be eligible, your spouse’s assessable income plus reportable fringe benefits must be less than $10,800.
You will be entitled to a pro-rata amount if your spouse’s assessable income plus reportable fringe benefits exceeds $10,800 but is below $13,800.
In order to make a spouse contribution, your spouse must be less than 65 years of age or satisfies the work test (ie. gainfully employed for at least 40 hours in a 30 consecutive days period in the financial year) if aged between 65 and 69 years of age inclusive.
Timing Of Contributions Is Important
The timing of contributions is important for various reasons (such as tax deductibility and contributions cap purposes) and the ATO has strict rules in determining when a contribution is made.
If a contribution is made by electronic funds transfer (EFT), the contribution is made when the funds are credited to the superannuation funds account.
If you are making a contribution by cheque, the contribution is made when the cheque is received by the superannuation trustees. However, the cheque must be promptly presented and honoured.
As 29 and 30 June 2013 falls on a Saturday and Sunday respectively, you should ensure that contributions are not made at the last minute!
Tax Free Component Matters
As a benefit withdrawal is tax free for those aged 60 or above, it seems that the tax free component of the superannuation benefits does not matter anymore. However, that is definitely not the case!
For example, you may wish to commence a transition-to-retirement pension when you are aged between 55 and under 60. The benefits withdrawn that are subject to tax are reduced by your tax free component.
The tax free component is also important for estate planning purposes, in particular when paying benefits to non-dependents.
Therefore, you should start thinking ahead and plan early to explore opportunities to increase your tax free component (ie. non-concessional contributions).
We would be happy to discuss the possible strategies, the benefits and how to implement such strategies.
Minimum Pension Relief Is No More
The minimum pension relief will cease on 30 June 2013. For the 2013-14 financial year, self-funded retirees with an account based pension are required to take the standard minimum pension for the year. The minimum pensions are based on the following table:
Changes To SMSF Supervisory Levy
The Government has announced that the SMSF supervisory levy will increase from $191 for the 2012-13 financial year to $259 from 2013-14 onwards to ensure full cost recovery for regulating the sector.
Transitional Retirement Income Streams
Transition to retirement income streams (TRISs) have been popular since their introduction in 2005 as they can offer considerable tax benefits for those who are able to salary sacrifice into super.
Any individual aged 55 years or over can consider commencing a TRIS. There is no requirement for you to retire before commencing a TRIS. Upon commencing a TRIS, your superannuation benefits will be put into pension mode. Any income or capital gains earned from assets funding your pension will be tax free within the SMSF.
Furthermore, franking credits received by the fund can then be used to offset the 15% tax on contributions with any surplus franking credits to be refunded.
If aged 60 years or over, the payments from the income stream are not taxed in the hands of the recipient. If aged between 55 and under 60, you will be taxed on the taxable component at your marginal tax rate less a 15% tax offset.
Therefore, you should commence a TRIS if you are aged 60 years or over.
If you are aged between 55 and under 60, please contact us to discuss the opportunities and value of commencing a TRIS.
New SMSF Investment Strategy Requirements
New regulations for SMSF investment strategies came into effect on 7 August 2012.
Under the new regulations, SMSF trustees are required to consider the personal circumstances of the members when formulating or reviewing the fund’s investment strategy. In doing so, they need to determine whether the fund should hold an insurance policy that provides cover for one or more members of the fund. However, the new regulations do not impose a requirement that a SMSF actually obtains an insurance policy for its members, merely that it be considered.
In addition, SMSF trustees are required to regularly review the fund’s investment strategy to ensure it continues to reflect the purpose and circumstances of the fund and the members.
SMSFs Must Value Assets At Market Value
From 1 July 2012, SMSF trustees must value the fund’s assets at market value for reporting purposes.
To assist SMSF trustees in complying with the new regulations, the ATO has released a publication providing guidance on valuation methodologies for SMSFs.
The ATO will generally accept a valuation if the valuation process is fair and reasonable, and the valuation is based on object and supportable data.
It is important to note that a single general rule does not exist. What is considered to be acceptable will depend on the type of asset and the valuation purpose.
Lastly, there is no specific requirement that valuations must be performed by a qualified independent valuer. However, the ATO recommends one be used if the asset represents a significant portion of the fund’s value (eg. property) or the nature of the asset would mean the valuation would be complex.
Any fund holding property, collectibles or artwork should arrange for a valuation to be undertaken close to 30 June 2013
Increased Contributions Tax For High Income Earners
The Government announced in the 2012-13 Budget that high income earners (being those who earn more than $300,000 per annum) will be taxed an extra 15% on their concessional contributions. The extra tax will bring the total contributions tax liability to 30%.
If an individual would not have exceeded the threshold except for their concessional contributions, the additional tax will only apply to the part of concessional contributions above the threshold.
The proposed measure is intended to apply to contributions made or received by high income earners on or after 1 July 2012.
As of the date of publication, the bill is before the Senate and therefore not law. We will provide an update on this measure in due course.
Superannuation Is Still Attractive
Despite all the changes surrounding superannuation, in particular the SMSF sector, superannuation remains an attractive vehicle to save for your retirement. However, the key is to start planning early!
If you have adult children in the workforce, then it would be beneficial to discuss their superannuation savings plan to get them on the right path early.
Further, as adult children and their families are the biggest financial threat to your retirement, it is worth ensuring that they are adequately insured so that if something does go wrong, the financial burden is not yours.
We can assist in putting in place the right insurance solutions. Please contact us to discuss.