Superannuation from 1 July 2012

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Changes continue to be made to the superannuation legislation. The following rules apply from 1 July 2012.

Contributions caps

The concessional (before tax) contributions cap is $25,000 for 2013 and 2014 for everyone regardless of age. From July 2014 this will increase to $50,000 for individuals over 50 who have less than $500,000 in superannuation. The concessional cap includes salary sacrifice, employer contributions and deductible member contributions. Individuals who salary sacrifice should assess their arrangement to ensure their contributions do not exceed the above limits. Individuals whose employers contribute more than the minimum 9% should also consider whether the threshold will be exceeded at current contribution levels.

The non-concessional (after tax) contributions cap is $150,000 per annum or $450,000 if the "bring forward" option is used. The non-concessional contributions cap is six times the level of the concessional cap.

Significant penalties apply where the caps mentioned above are exceeded.

Contributions in excess of the non-concessional cap will be taxed at 46.5%. The excess contributions tax must be paid from your superannuation member account.

Contributions in excess of the concessional cap will be taxed at a penalty rate of 31.5% in addition to the 15% contributions tax. The excess contributions tax may be paid from your personal funds or from your superannuation member account.

A new one-off refund option applies from 1 July 2011 where eligible individuals breach the concessional cap for the first time. The breach must be for $10,000 or less. This gives the individual the option of withdrawing the excess concessional contributions and having them assessed as income at their marginal tax rate.

Contributions tax for high income earners

Individuals with incomes higher than $300,000 pay 30% contributions tax from 1 July 2012 on non-excessive concessional contributions.

Contributions tax for low income earners

From 1 July 2012 individuals with Adjusted Taxable Income of $37,000 or less receive a refund of contributions tax on concessional contributions of up to $3,333 in the form of a low income Government superannuation contribution. This contribution will be 15% of an individual's concessional contributions during the financial year, capped at $500.

Reduced Minimum Income Stream Payments

The Minimum Income Stream Payment will continue to be 75% of the legislated minimum in each age category in the 2013 year.

The updated percentage factors are as follows:

While members must take at least the minimum payment each year, with the exception of Transition to Retirement Income Streams, there is no maximum limit imposed.

Government Co-contribution reduced

Both the employed and self employed who make after tax, personal contributions to superannuation may be entitled to the Government Co-Contribution. In the 2013 year, the Government will contribute 50c for every dollar contributed to superannuation, up to a maximum of $500. The maximum co-contribution may be received when total assessable income is below $31,920 and phases out by 6.666 cents for every dollar as income rises to $46,920 per annum.

Superannuation income tests

Reportable employer super contributions, along with a number of other items, are added back to assessable income to arrive at an adjusted income figure. This adjusted income figure is used to determine eligibility for family assistance payments, Government co-contribution, certain tax offsets and concessions, HELP compulsory repayments and deductibility of personal superannuation contributions.

Reportable employer super contributions are salary sacrificed super contributions or other contributions your employer makes to a super fund on your behalf that are additional to the minimum contributions they must make under super guarantee law, an industrial agreement, the trust deed of the fund or a federal, state or territory law. Any reportable employer super contributions will be disclosed on annual payment summaries and reported to the ATO by your employer.

Planning issues to consider

Transition to Retirement Income Stream
Reaching your preservation age (currently age 55) allows you to access your superannuation benefits via a Transition to Retirement Income Stream (TRIS). A TRIS can be used to supplement your income if you wish to reduce the hours you work. It can also enable you to reduce the tax you pay and increase your retirement savings by continuing to work full time and salary sacrificing more heavily into superannuation while maintaining your net income.

The "bring forward" Option
Members under age 65 can "bring forward" two years of entitlements to non-concessional contributions enabling them to make non-concessional contributions of up to $450,000 in one year. The member is not required to meet the work test for all three years. The member must be 64 or under at 1 July of the year when this "bring forward" is triggered.

Contributions after age 65
By meeting the work test (working 40 hours in a 30 day period) after the age of 65 you may continue to make contributions to your fund. The "bring forward" option for non-concessional contributions is not available to members over age 65.

Superannuation Components and Proportioning Rule
Super interests consist of two components, being tax-free and taxable. Any withdrawal made is calculated under the proportioning rule. This rule requires that the benefit be paid in proportion to the total taxable and tax-free components of the entire member balance. In general, the taxable component consists of concessional contributions and fund earnings prior to income stream commencement and the tax-free component consists of the crystallised component calculated at 30 June 2007 and non-concessional contributions made since then.

The taxable and tax-free components are determined just before a lump sum benefit is paid and when an income stream commences. Once an income stream has commenced, the proportions calculated at commencement stay in place during the life of the income stream.

These two components determine the taxation payable when a benefit is withdrawn by the member. The tax-free component is always excluded as it is not assessable income in all cases. The taxable component is also excluded if the member is over age 60. If the member is under age 60 the taxable component of an income stream payment is taxed at the member's marginal tax rate. A 15% offset applies if the member is aged between preservation age and 59. For the taxable component of a lump sum withdrawal where the member is aged between preservation age and 59, no tax is payable up to the unused low rate cap amount (currently $175,000) and anything above this at a maximum rate of 15% plus the Medicare levy. The taxable component of a lump sum withdrawal prior to preservation age is taxed at a maximum rate of 20% plus the Medicare levy.

Withdrawal and re-contribution strategy
Prior to retirement you may wish to use the withdrawal and re-contribution strategy to boost the tax free component of your member balance. The strategy involves withdrawing a portion of your superannuation as a lump sum then re-contributing the balance back as a non-concessional contribution. You must have unrestricted non-preserved benefits available to use this strategy and carefully consider the tax implications prior to implementation.

Preservation rules
The preservation rules restrict access to your superannuation until certain conditions are satisfied. Generally your member benefits are either preserved benefits (must be kept in the superannuation system for your retirement) or non-preserved benefits (accessible at any time). Since 1 July 1999 all contributions to your superannuation account and all income earned on that account are preserved benefits.

A member's preserved benefits can only be accessed if one of the following conditions of release is satisfied:

Estate planning considerations

Superannuation benefits paid to a member after they reach age 60 are tax free. Lump sum death benefits continue to be tax free if paid to a dependant. The definition of a dependant is defined by the Tax Act and includes a spouse, a child under 18, a financially dependent child between 18 and 25, a financial dependant (other than a non-disabled child over 25) and an interdependent person.

Under the superannuation laws, the taxable component of a lump sum paid to a non-dependant will be taxed at 15% plus the Medicare levy even though the member may have turned 60 and have been eligible to withdraw the money tax-free during their lifetime.

If a member aged over 60 were to make a withdrawal from their superannuation fund and give it to their adult children before they die, the funds would be passed on tax free.
There is, therefore, a need to continue to consider appropriate strategies and obtain ongoing Estate Planning advice.

Published : July 2012