Hurry Super Double Tax Deduction Opportunity before 30th June 2007 Part 2 - Best Practice News Alert

HEALTH & LIFE’S BEST PRACTICE NEWS ALERT CURRENT CIRCULATION: DATE: ISSUE NO:

7019 28th April 2007 143

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Writer in charge: Mr Maurice Nistico DipFP CFP GAICD.

Hurry Super Double Tax Deduction Part 2

Problem – Part 2 - Max Deductible Contributions to Super from $210,000 Pre 30 June 2007 to $100,000 Post 1 July 2007.

Superannuation Double Deduction opportunity Ceases June 30th – Act Now. The proposed 1 July 2007 super reform changes can significantly limit the ability to maximise tax-deductible super contributions as the existing age based limits will be replaced with a “global” deductibility limit from 1 July 2007.

Until 1 July 2007, there is an opportunity to utilise the existing aged based rules and obtain significant tax advantages. This can be achieved by what is commonly known as the “double deduction” strategy.

The double deduction strategy generally involves clients “double dipping” to make full use of two age-based limits in order to tax effectively increase their super accumulation.

In this issue 1. Deductibility of Super Contributions – the current environment 2. Deductibility of Super Contributions post 1 July 2007 3. Case study 1: Gabriel the GP - Personal and employer contributions 4. Case study 2: Callum the Dental Surgeon Non-associated employers 5. Where to from here?

Hurry Super Double Tax Deduction Part 2

1. Deductibility of super – the current environment Generally, a tax deduction is available for superannuation contributions in 3 broad instances: 1. Where an employer contributes on behalf of an “eligible” employee, 2. Where a “self employed” or “unsupported” person makes personal superannuation contributions, and 3. Where a person who satisfies the “less than 10%” rule* makes personal superannuation contributions.

More importantly, under current rules it may be possible for an individual to satisfy more than one category, in which case, multiple age based limits could be available in the same financial year.

With current age based limits set at $105,113 for persons aged 50 or over, it may be possible for over $210,000 to be tax effectively contributed to super in the 2006/07 financial year! *with less than 10% of their total income and reportable fringe benefits derived from employment 2. Deductibility of Super Contributions post 1 July 2007 From 1 July 2007, it is proposed that age based deductible contribution limits be abolished and replaced by a global limit for concessional tax treatment of deductible contributions.

Further, the global nature of this new limit will mean that all deductible contributions received on behalf of an individual will be assessed against the one threshold. This will include: • Superannuation Guarantee (and other mandated employer contributions); • Salary sacrifice; and, • Personal contributions for which a tax deduction is claimed.

Although some people may still be eligible to receive deductible contributions from both their employer(s) and/or for personal contributions, under the new rules the total of all these deductible contributions will be combined when assessing them against that individual’s limit.

The new limit has been set at $50,000 per person per financial year. However, transitional rules for persons 50 or over will apply, allowing them to receive up to $100,000 per person per financial year up to, and including 2011/12.

As such, these limits, and more importantly the global way in which they will be applied, significantly reduce the amount of deductible contributions that can be received in any particular financial year after 1 July 2007.

3. Case study 1: Personal and employer contributions Gabriel is 45 years old. He is a GP with a self employed income of $80,000 per annum plus a part time employment income of $38,000 from his local hospital.

2006/07 financial year Gabriel decides to salary sacrifice $35,000 of his salary into superannuation. This will reduce his employment income down to $3,000 and his total income down to $83,000.

As a result, he now satisfies the under 10% test and hence qualifies for a personal tax deduction as a self-employed person. To maximise his deductible super contributions, he also makes a further $54,847 contribution to super and claims a personal tax deduction of $42,385 (ie the first $5,000 plus 75% of the balance).

Effectively, Gabriel has been able to receive $77,385 of deductible contributions in 2006/07 resulting in a maximum tax rate of 15% (compared to his marginal tax rate of 41.5%). His taxable income for the year will fall from $118,000 to $40,615 significantly reducing his tax bill whilst increasing his super benefits.

2007/08 financial year As Gabriel is under age 50, he will be subjected to the new $50,000 global limit.

So, whilst he will still be able to receive and make both salary sacrifice and personal deductible contributions (as long as he can continue to satisfy the 10% test), he will be limited to $50,000 per financial year.

Deductible contributions above this limit will be subjected to tax at the highest marginal tax rate plus Medicare levy (ie 46.5%).

At best, his taxable income could be reduced from $118,000 to $68,000. Not only does this restrict the tax savings available but it also limits the amount he is saving in super as evidenced below.

Summary 2006/07

2007/08

Taxable Income: Before Strategy

$118,000

$118,000

Taxable Income: After Strategy

$40,615

$68,000

Tax Payable: Before Strategy

$36,820

$36,820

Tax Payable*: After Strategy

$19,751

$24,270

Total Super Contribution

$89,847

$50,000

Net Super Contribution

$78,239

$42,500

* Includes medicare levy & contributions tax

4. Case study 2: Non-associated employers Callum is 51 years old. He receives $110,000 salary as a dental surgeon at the Oaks public hospital. Callum is also employed at a private local dental clinic Denture Boys Pty Ltd where he receives a salary of $200,000. He is approaching retirement and would like to boost his retirement savings.

2006/07 financial year In the 2006/07 year, he has decided to salary sacrifice $105,113 from his salary at the hospital as well as $105,113 from his salary at the private practice.

Effectively, he has been able to accumulate over $210,000 at a maximum tax rate of 15% (compared to his marginal tax rate of 46.5%). At the same time, his taxable income for the 2006/07 tax year has reduced from $310,000 to $99,774.

2007/08 financial year As Callum is over 50, he will benefit from the transitional period and be able to use the $100,000 limit (at least until 2011/12).

Both of Callum’s employers will still be able to contribute on his behalf and receive a tax deduction.

However, to avoid paying tax at the top marginal tax rate (plus Medicare Levy) Callum will need to ensure that the total of these contributions does not exceed the $100,000 limit available to him.

With this in mind, Callum would effectively only be able to receive $100,000 in deductible contributions meaning his taxable income will only come down to $210,000.

Summary 2006/07

2007/08

Taxable Income: Before Strategy

$310,000

$310,000

Taxable Income: After Strategy

$99,774

$210,000

Tax Payable: Before Strategy

$124,500

$124,500

Tax Payable*: After Strategy

$60,790

$93,000

Total Super Contribution

$210,226

$100,000

Net Super Contribution $178,692 * Includes medicare levy & contributions tax

$85,000

5. Where to from here?

1. Consider your superannuation deductible contribution strategy. Can you take advantage of the ‘double dip’ before the new rules apply post June 30 this year?

2. Consult your adviser to discuss these issues. If you require retirement income calculations or more information about any issues raised in this article. Call us on 1800 077 222 or email Maurice Nistico on mauricen@healthandlife.com.au . We are happy to receive any feedback and will provide a free initial telephone consult.

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