(03) 9020 2905PORTFOLIO POINT: The rumblings are getting louder that Wayne Swan will tinker with super again in next month’s Budget. So, here are nine things to consider doing now.
Not that investors knew at the time, but this time last year we were about half-way through a market meltdown. This year, there are other things for super members and trustees to be worried about.
It’s sounding increasingly likely that the Federal Government is going to tinker with super again. It sounds like the same forces that have been influential in some other Labor Government decisions are at it again, claiming super is now too generous and that the tax benefits should be wound back (including franking credits). Governments just can’t help themselves when it comes to super. They think they know better. But, for everyone in and around super, “better” would be a whole decade of doing nothing. No chance. And any change this year would be likely to be politically motivated, rather than simple maintenance and repair.
So, let’s play the rules that we’ve got in front of us now. And with the end of financial year approaching, here’s a list of things that you make sense to do now and that are unlikely to be impacted by next month’s budget. (Any changes would most likely be for the 2009-10 or 2010-11 financial years.) We’re getting these super suggestions out early so that members and trustees have plenty of time to get their affairs sorted before the end of the financial year.
- Check the status of your transitional August 1999 SMSF
For those with certain pre-August 1999 SMSFs that have had protected investments under transitional rules, this is a crucial issue and time is ticking away quickly. The transitional period for these funds runs out on June 30, 2009.
In August 1999, the ATO changed the definition of “in-house assets” relating to investments in related unit trusts. One of the advantages of these pre-99 SMSF/trust structures was that it had allowed SMSFs to be able to gear through the unit trust. The ATO gave a 10-year transitional period in order to make adjustments to the investments to ensure compliance.
If you have a pre-99 fund, then you should speak to your accountant immediately about whether there is any action required in order to make sure the fund will be compliant, post June 30 this year.
The ATO has warned that it has seen, and is concerned by, parties trying to sell inactive pre-August 1999 funds. Some parties have been claiming that buying these SMSFs, and making certain investments through the related trusts by June 30, would get trustees around the transitional provisions.
“We are aware these arrangements are being promoted and are concerned that taxpayers may be tempted into such arrangements without realising that the transitional provisions may not apply to their circumstances,” said Tax Commissioner Michael D’Ascenzo.
The gearing attractiveness of these funds has obviously waned with the introduction of the changes the ATO made in September 2007, which allowed all super funds to gear under defined circumstances.
- Don’t delay on putting in your co-contribution
For those who are eligible, this is probably the best return on offer to super fund members. You put in a sum of up to $1000 and the government automatically gives you up to $1500. A 150% return. Nothing has beaten that in a while.
As always with these things, there are a few hurdles.
- For the 2008-09 financial year, you need to earn less than $60,342.
- You need to be less than 71 years of age.
- You need to make the contribution into a complying fund before June 30.
- 10% or more of your income needs to come from eligible employment, running your own business, or both.
- You’ve lodged a tax return.
- You didn’t hold a temporary resident visa at any time during the financial year.
- These contributions are non-concessional (that is, no-one is claiming a tax deduction for the contribution).
You will gain the full $1500 government co-contribution if you put in $1000 and are earning less than $30,342 for this financial year. For every dollar earned above $30,342, the maximum contribution comes down by 5c and runs out at $60,342.
- Review and rebalance your portfolio
The lead up to tax time should be another good trigger point for a top down survey of your super fund’s investments. What did the crash do to your portfolio? Did you sell down into cash? Did you hold on to equities? Have you been keeping a watching brief on that long-forgotten asset class of fixed interest?
If you’re not one who constantly rebalances your portfolio, then making the time to reassess your portfolio around now – tax time – is as good a time as any.
Most members in managed fund super (retail, corporate or industry funds) who are in manager-of-manager funds probably won’t need to do much. If you’re in the “balanced” fund option, or the “growth” fund option, then someone is looking after your asset allocation for you.
However, there are increasing numbers of people who are doing their own asset allocation by choosing what percentage or dollar amount should be held in the four asset classes (shares, property, fixed interest and cash). These can very quickly get out of whack (unless an auto-rebalancing feature is used) and requires regular review, if not regular action.
- Salary sacrifice arrangements
If you’re going to earn “too much” money this year and you think you’ve got an upcoming tax problem – then you’ll get no sympathy here. That’s a problem everyone wants to have.
But it’s not too late to be able to do some tax planning care of salary sacrificing. Salary sacrificing allows individuals to contribute money to their super funds rather than take it as salary. In doing so, they will face a maximum 15% tax on those contributions, rather than up to 46.5% if taken as salary (for those earning more than $180,000).
There are still two months left of this financial year, so if you’re looking to reduce your overall tax position, then consider taking advantage of the concessional tax limits (see next section).
Don’t forget that salary sacrifice arrangements can only apply to income that is yet to be earned. It can’t be done to retrospectively decrease salary you’ve already been paid in the financial year.
- Taking contributions to the limit
If you are contributing to super, then don’t forget to take into account the super contribution limits. Thankfully, there are really only two to worry about (concessional and non-concessional).
Concessional contributions are essentially the 9% Superannuation Guarantee contributions from your employer and your own personal salary sacrificed amounts. These are super deposits on which the 15% contributions tax is paid on entry to the fund, because the money has not been previously taxed. The limit for concessional contributions is $50,000 a year. However, there is a transitional limit for those aged over 50 of $100,000 a year. This higher transitional limit is in place for this financial year and for three more years following this one. It is a powerful way of getting money into super, for those on higher incomes who have the most to benefit.
The non-concessional limit of $150,000 is designed to take after-tax money. Eligible members can contribute up to $150,000 a year. Or they can bring forward two years payments and make a contribution of up to $450,000. No further non-concessional contribution can be made until after the end of the third financial year.
This can allow couples to get in up to $900,000 between them – which could be after-tax proceeds of selling property, for example.
However, if you do have a large previously-taxed sum to contribute to super, you might want to consider the following: Put in no more than $150,000 prior to June 30 and then put in $450,000 after that. That would allow you to get $600,000 per person in, in a two-month period.
- Transfer quality assets into super
While few are sitting on any big capital gains from purchases in recent years, it could make sense to transfer some assets into your super fund. Low asset prices could also be a good time to minimise any capital gains tax implications you might have had previously for transferral.
For example, if you had shares that you bought 15 years ago for $50,000 that had reached $200,000 at their peak in 2007 and are now worth $120,000, then you might want to consider transferring them in specie into super now. You would have to pay capital gains on some portion of the gains from $50,000 to $120,000. But if you then hang on to those shares until you can access them tax-free, then you might get to keep all the gains from here in. This could be a particularly attractive strategy worth pursuing for those who are within, say, five years of retirement or taking a pension when capital gains become tax free.
- Update your insurance inside super
The easing of some super restrictions in July 2007 has meant that insurance inside super has changed dramatically. For a start, the removal of reasonable benefit limits (RBLs. Remember them?) means that most people will be able to hold all the insurance they need inside their super fund.
But a change that has got less attention is income protection insurance (also known as salary continuance). Prior to July 2007, a tax deduction was only allowed for income protection for periods of cover of up to two years. This often meant that clients would have cover inside the fund for two years and then take out further cover to age 65, with a waiting period of two years.
This is no longer necessary. Super funds can claim deductions for insurance through to the age of 65. So those wanting income protection insurance inside super can get the cover they require inside their fund.
While this also applies to managed-fund super, the fact is that many large super funds (including industry funds) have been slow to make the necessary changes. Many super funds are still only offering insurance to cover members for two years.
8. Make a contribution for your low-income spouse
Making a contribution for a low-earning spouse can still be worthwhile, even though some bigger tax benefits have been introduced that have taken some of the gloss away from this rebate. A rebate of up to $540 is available for the contributing spouse for contributions of up to $3000 into super for a low or no-income partner. The full rebate is available for spouses earning less than $10,800 and cuts out once the spouse’s salary hits $13,800.
9.Find lost super
Here’s a reminder for everyone who has never done this. Grab your tax file number and head to the Tax Office’s website, www.ato.gov.au . There is in excess of $12 billion worth of lost super, according to Superannuation Minister Nick Minchin. People have often lost it because they’ve moved address or work and haven’t transferred their details to the fund.
If you find that you do have some lost super, there’s a process that you can go through to be able to reclaim it or have it rolled over to another of your existing super funds.
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We don’t know exactly what the government is planning to do with superannuation in next month’s Budget. We can only take advantage of the rules now (and hope that they leave super alone).
Take the time now to understand how you can tone up your retirement sum before the end of this financial year.
Bruce Brammall is the author of Debt Man Walking and principal financial adviser with Castellan Financial Consulting.