Superannuation is one of the most effective savings vehicles available and the Simpler Super changes taking effect on 1 July 2007 are set to increase the attractiveness of super even further.
However, many Australians are not fully aware of the changes taking place. A recent survey by Mercer1 indicates that 70 per cent of working Australians over 50 years of age cannot articulate any of the Simpler Super changes.
Members of super funds need to understand how the Simpler Super changes will effect them, both before and after 30 June 2007, so they can make immediate changes to their super arrangements and benefit from the opportunities that exist now, and to optimise their financial planning over the longer term.
The tax-free super window
Between 10 May 2006 and 30 June 2007 the Government will give you a one-off opportunity to contribute up to $1 million of after-tax money to super.
While Simpler Super changes mean withdrawals from taxed super funds become tax-free for those over 60, it is always recommended that members seek expert advice when considering making additional contributions or converting non-super assets into super in the lead up to the changes.
The $1 million opportunity has already had a significant effect on contribution levels. legalsuper can report that member contributions in the 9 months ended 31 March 2007 have increased by a factor of three over the same period as last year.
The $1 million opportunity has also lead to growth across all types of super funds and in particular in Self Managed Super Funds (SMSFs, also known as ‘DIY Funds’).
While SMSFs may be appropriate for some, many experts are advising caution because of their inherent complexities, costs and limitations, a point recently underlined in a joint statement issued by the Australian Tax Office and Australian Securities & Investments Commission, which observed that:
“…you need around $200,000 in super to make the costs of a SMSF worthwhile…[W]ith less than this amount, the fund may have difficulty earning enough to make set-up and running costs worthwhile. SMSFs can typically cost around $1,700 to run each year, and quite often cost more.”2
Recognising the interest Australians have in investing in shares, some non-SMSFs are now offering investment options that give members greater control over where their super is invested without the added burden of administration and compliance. Options like legalsuper’s ASX 200 option let members invest up to 50 per cent of their super in ASX200 companies.
Contributing to super after 1 July 2007
Arguably the biggest change under Simpler Super is that withdrawals from a taxed super fund (such as legalsuper) will be completely tax-free after age 60 — whether paid as a pension or lump sum.
However, the Federal Government has also introduced limits on how much people can pay into super, including limits for after-tax and before-tax contributions.
After-tax contributions (now known as ‘non-concessional’ contributions)
From 1 July 2007 the maximum personal after-tax contribution will be capped at $150,000 per year, although three year’s worth — $450,000 — can be put in at once.
The sting in the tail is a 46.5 per cent tax on any after-tax contributions that exceed the cap.
Before-tax contributions (now known as ‘concessional’ contributions)
Before-tax contributions include superannuation guaranteed contributions, salary sacrifice contributions, and personal contributions claimed as a tax deduction by self-employed persons.
From 1 July 2007 there is a cap of $50,000 per annum for before-tax contributions. The existing aged-based limits will be abolished from 1 July 2007.
For Australians aged 50 and over, the cap has been increased to $100,000 per annum between 1 July 2007 and 30 June 2012.
Before-tax contributions above in excess of the $50,000 cap will be taxed at 46.5 per cent, including the existing 15 per cent tax levied upon super funds.
For Australians aged 50 and over, the cap has been increased to $100,000 per year between 1 July 2007 and 30 June 2012.
What all this means is that in future it will limit the possibilities for Australians to ‘top up’ their super at the last minute before they retire. Rather, Australians will need to start saving earlier and build their super over a longer timeframe. It is anticipated this will encourage Australians to take a longer-term view of their retirement planning.
Andrew Proebstl, Chief Executive, legalsuper
legalsuper is a not-for-profit, no-commission super fund that returns all profits back to members.(www.legalsuper.com.au)
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Endnotes
- Mercer Wealth Solution’s Simpler Super Study, May 2007
- ‘Is self managed super right for you?’ published by the Australian Taxation Office and Australian Securities & Investments Commissions, May 2005
