A(nother) new era of super contributions advice

Tim Sanderson– Senior Technical Manager

June 2013

This presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial First State Pooled Superannuation Trust ABN 51 982 884 624.

The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on 13 13 36.

All products are issued by Colonial First State Investments Limited. Product Disclosure Statements (PDSs) describing the products are available from Colonial First State. The relevant PDS should be considered before making a decision about any product. Stocks referred to in this presentation are not a recommendation of any securities.

The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation.  

This presentation is for adviser training purposes only and must not be made available to any client.

This presentation cannot be used or copied in whole or part without our express written consent.

© Colonial First State Investments Limited 2013.

Disclaimer

What we’ll cover…

Changes since 1 July 2012Super guarantee moves to 9.25% and age limit removedConcessional caps permanently reduced for over 50sReduced co-contribution, introduced low income earner contribution15% extra tax on concessional contribution where income > $300,000Reforms to excess concessional contributions

Strategy impact to considerSaving for retirement generallyLower income earning clients – finding the right mix of contributionsTransition to retirement

Super guarantee opportunities and traps

Employers must ensure contributions updated to avoid SG charge

Particularly for employees aged 75 and over

Employees should consider effect on salary sacrifice arrangements

Opportunity for those over 75 to derive OTE and add to super via SG contributions

Year Rate

2012/13 9%

2013/14 9.25%

2014/15 9.5%

2015/16 10%

2016/17 10.5%

2017/18 11%

2018/19 11.5%

2019/20 or later 12%

Upper age limit removed from 1 July 2013

Concessional cap changes

Transitional cap for over 50s ended on 30 June 2012

Higher cap for those over 50 (with total super balance under $500,000) proposed, then delayed to 2014, then abandoned

Flat higher cap of $35,000 now proposedIf aged 60 or over from 1 July 2013If aged 50 or over from 1 July 2014

While simple to administer, higher cap is not indexedStandard cap estimated to go to $30,000 in 2014 and $35,000 in 2018Higher cap irrelevant once this occurs

Voluntary concessional contributions further limited by gradual increase in SG

Contribution cap changesUnder age 35

Aged 35 to 49

Aged 50 to 59

Aged 60 or over

2006/07 $15,260 $42,385 $105,113 $105,113

2007/08 $50,000 $50,000 $100,000 $100,000

2009/10 $25,000 $25,000 $50,000 $50,000

2012/13 $25,000 $25,000 $25,000 $25,000

2013/14 $25,000 $25,000 $25,000 $35,000

2014/15 $30,000 $30,000 $35,000 $35,000

% change since 2006/07

+97% -29% -67% -67%

Cumulative contributions over 10 years

07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

pre simpler super rules Simpler super standard capsSimpler super transitional / higher caps

Getting to $1 Million by retirement

30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

John's contributions Linda's contributions

John needs to use $525,000 of his gross income to get there

Linda needs to use $264,000 of her gross income to get there

Recent cases highlight end of year timing issues

Contribution made to a clearing house by an employer on 27 June of FY1, not passed to fund until late July of FY2.

Salary sacrifice agreement required employer to pay salary sacrifice on a monthly basis, paid late and after end of FY1

Client made contribution by EFT on Saturday 28 June. Funds received in super fund bank account 1 July.

Other things to be aware of:Salary sacrifice and bonusesDeductible contributions and taxable income

Changes to excess concessional contributions

Allow members to withdraw any excess contributions from 1 July 2013not limited to $10,000 on one off basis

Excess taxed at member’s marginal rate plus interest charge

Excess non-concessional contributions still taxed at 46.5%

Reserve allocations?not technically contributions, but ‘amounts’ that generally count toward concessional cap

Contributions for high income earners

30% effective tax rate on non-excessive concessional contributions where income exceeds $300,000

Income includesTaxable incomeReportable fringe benefitsTotal net investment lossLESS taxable component of super lump sum within low rate capPLUS ‘Low tax super contributions’

Low tax super contributions Generally non-excessive concessional contributions

Excludes untaxed rollovers / foreign super transfersDB funds – ‘notional’ amount calculated by actuaryCertain state higher level office holders contributions to constitutionally protected funds only counted if made under a salary package arrangementJudges and justices – DB contributions generally ignoredWhat about excess contributions disregarded / reallocated?

Contributions for high income earnersIs super still viable for those who earn over $300,000?

$150,000

$200,000

$250,000

$300,000

$350,000

$250,000 $250,000

$275,000 $275,000

$16,470

$16,470

$16,470 $16,470

$40,000

$50,000 $50,000

$8,530

$8,530 $15,000

salary

other income

SG

salary sacrifice

15%

15%

30%

46.5%

30%

30%

Contributions for high income earners

Collecting the tax – accumulation fundsSimilar to excess contributions taxNotice of assessment , due within 21 daysVoluntary release authority

Collecting the tax – defined benefit fundsATO creates a ‘debt account’ against the DB interest, which accrues with interest until an end defined benefit becomes payable (eg, retirement)Client can make voluntary repayments off the debt accountOnce the defined benefit becomes payable, notice of assessment and voluntary release authority issuedVoluntary release authority can only be given to that relevant DB fund

What happens where a client has contributed to multiple funds?

Contributions for lower income earnersCo-contribution:

Maximum co-contribution halved from 1 July 2012 to $500Matching rate reduced from 100% to 50%Still reduces by 3.333c for each dollar of income over $33,516* Reduces to Nil at $48,516*

Low income earner contribution:To be eligible

ATI does not exceed $37,00010% test is met (same as co-contribution)

15% of concessional contributions, up to maximum of $500

Where no tax return required, ATO will calculate based on available information

* Proposed income thresholds for 2013/14

New ‘rules of thumb’ for low income earners

$10

,000

$12

,000

$14

,000

$16

,000

$18

,000

$20

,000

$22

,000

$24

,000

$26

,000

$28

,000

$30

,000

$32

,000

$34

,000

$36

,000

$38

,000

$40

,000

$42

,000

$44

,000

$46

,000

$48

,000

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Optimal super contribution for $5,000 pre-tax income

Salary sacrifice Low income super contributionNon-concessional contribution Government co-contribution

Income

To

tal n

et

su

pe

r c

on

trib

uti

on

$1,000 NCC then next $3,333 concessional

or NCC then remainder NCC

$1,000 NCC then next $3,333 concessional

then remainder concessional

NCC to maximise co-contribution then

next $3,333 concessional then

remainder concessional

NCC to maximise co-contribution then

remainder concessional

$20,542 $31,920 $37,000 $46,920

Transition to retirement – still effective?

Transition to retirement still effective

No T

TR

TTR

$50,0

00 c

ap

TTR

$25,0

00 c

ap

Retirement balance at age 60

$749,931

$711,814

$735,935

Example:Client 55 years of age, earning $100,000 p.a. with existing super balance of $500,000. Comparing impact of various caps over 5 years while maintaining net take home incomeAssumptions:

Return of 7% p.a. Inflation: 3% p.a. Nil indexation on salaryAny surplus income (above CC available) re-contributed as non-concessional contribution

TTR

$35,0

00 c

ap

$746,173

Transition to retirement still effective

No T

TR TTR

$50,0

00 c

ap

TTR

$25,0

00 c

ap

Retirement balance at age 65

$784,008

$711,814

$763,944

Example:Client 60 years of age, earning $100,000 p.a. with existing super balance of $500,000. Comparing impact of various caps over 5 years while maintaining net take home incomeAssumptions:

Return of 7% p.a. Inflation: 3% p.a. Nil indexation on salaryAny surplus income (above CC available) re-contributed as non-concessional contribution

TTR

$35,0

00 c

ap

$773,085

TTR considerationsReduced caps will have a different impact depending on:

AgeMTRSuper balance

TTR generally remains an effective strategy

Can even be effective with after tax contributions where:Over 60Large tax free componentLow income

Summary Client situation Strategy/ considerations

SG changes • Employers – make changes to avoid SG charge• Employees, review sal sac

Low income client • Squeeze every drop of government superannuation incentives

All clients in pre-retirement or wealth accumulation stages

• Start making concessional contributions earlier!

Very high income earners • Pre-tax contribution still tax effective• Watch out for income traps

Existing TTR clients • Adjust salary sacrifice amount• Adjust pension payment • Consider alternative strategies for the spare “$25,000”• $35,000 cap provides some additional value