Lifeplus Winter/Spring 2007

Contact us \| About us

Lifeplus Winter/Spring 2007

The no-waffle guide to Australia's new super system

New superannuation rules are now law, with most of the changes taking effect last month.

Unlike previous changes to super, these are worth getting excited about, according to Australian Unity's Head of Financial Planning, Ross Johnston. "Our super system was drowning in complexity and red tape. For example, a lump sum paid from a super fund could have up to eight different components, which could be taxed in seven different ways.

"It was a nightmare for retirees. As a result, many Australians were discouraged from investing in one of the best retirement savings systems in the world. Now that's all changed. The complexities have gone. New incentives have been added to encourage greater saving, and there's more flexibility to help people make a comfortable transition from work to a financially secure retirement."

Ross says the new system has something for everyone, particularly those with significant amounts in super or other savings. Attention initially focused on transitional arrangements that offered a limited opportunity to make after tax contributions up to $1 million before 30 June. But this diverted attention from a host of other changes that will benefit Australians of all financial circumstances, right down to a far more generous assets test for the Age Pension."

Ross says the Federal Government estimates the changes will cost Treasury almost $7 billion over the next three financial years. That's a big clue to the extra financial benefits that are ripe for picking. "In fact, the Government estimates an average wage earner can now expect an extra $136 a week in retirement if they take their benefit as a pension. Of course this assumes a lifetime in the new system – if you are retiring soon your gains largely depend on how much super you have saved."

Ross says it is easier to get the super system working for you because of the simplification of the rules, but he urges anyone who is serious about their financial goals to chat to an Australian Unity financial adviser about what the changes could mean for you.

"These changes are big enough to force a rethink of the role super has in your personal finances. Investments outside super are suddenly struggling to compete, and you really should be thinking about super as a voluntary rather than a mandatory form of investing."

He says the table below summarises how super compares to other investments.

"Super is way ahead in terms of its tax treatment. The trade-off is that it generally must be locked away until age 60 if you don't want to pay any tax on withdrawal. This means super should not be your only form of investment, especially if you are still relatively young. But it certainly should be a consideration when you are investing for long-term financial goals."

Tax rates – super versus other investments

	Super	Other Investments
Contributions	15% from pre-tax income	Up to 45.5% (top marginal income tax rate) from pre-tax income
Investment earnings	15%	Up to 45.5%
Withdrawal	No tax if withdrawn	Capital gains tax of up to after age 60 46.5% on any increase in value

Key features and what they could mean for you
At a glance	Main details	What it could mean for you
No taxes on super after 60	All taxes on super benefits taken after age 60 will be abolished from 1 July 2007. This means lump sums or pensions from super will be tax free, and the complex Reasonable Benefits Limit (RBL) system will be abolished.	You can still withdraw savings from your super fund from age 55, but if you wait until age 60 you won't pay any tax on withdrawals. This is a big incentive to keep working until at least age 60.
Two types of super contribution	Concessional contributions are paid from pre-tax income such as Superannuation Guarantee contributions and salary sacrifice. Non-concessional contributions are paid from after-tax income such as salary or investment income or the proceeds from the sale of an investment.	Super is now much easier to understand, with only two contribution types. Concessional contributions are highly beneficial because you only pay 15 percent tax on the way into the super fund. This compares to up to 46.5% (the top marginal rate plus Medicare) on money you put into investments outside the super system.
One concessional contribution limit	The age-based restrictions on how much you can contribute at concessional rates have been removed. From 1 July 2007, you can make concessional contributions of up to $50,000 per year. The only exception is for those aged 50 or turning 50 in the financial year, who can contribute up to a maximum of $100,000 each year in the financial years 2007-08 to 2011-12.	Another change that makes super simpler. It encourages Australians to make steady contributions over their working life, rather than in a rush as they approach retirement. The exception for people aged around 50 is a short-term measure to help those people who might be disadvantaged under the new rules.
More incentive to keep working	Concessional super contributions can be made up to age 75.	Under the old system, many Australians were forced to withdraw or cash out their super when they reached 65. Now, there is encouragement to keep saving until age 75. This reflects the fact that many Australians are working longer – some because of necessity to save more, but some because of a choice to stay active for longer.
One non-concessional contribution limit	Non-concessional contributions can be made if you are under age 65 or if you are aged 65 to 74 and satisfy a work test. If you are under 65, you can contribute up to $150,000 per year in non-concessional contributions or a maximum of $450,000 if averaged over three years.	Another easy-to-follow rule. Previously you could put unlimited amounts into super without seeking a tax deduction, but because the new super regime is so generous there is now a limit.
Easier asset test for Age Pension	The asset test for the Age Pension is being relaxed. Under the old system, retirees would lose $3 of their fortnightly payment for every $1000 above a certain threshold. This 'taper rate' is being halved to $1.50 from 20 September 2007. The family home will continue to be exempt from the assets test.	Based on the current Age Pension, this change means a single retiree homeowner can have an additional $177,000 of assets before losing the Age Pension, while a couple could have an extra $294,000 in assets.
New complying pensions lose their asset test concession	Tax concessions for complying pensions will be made tougher. Currently, 50 percent of assets in a new complying pension or TAP are not counted in the assets test. This exemption will be dropped for complying pensions and TAPs bought after 20 September 2007.	This is one of the few losses under the changes to the super system, but it does apply only to new pensions after 20 September 2007. Until that time, there is an opportunity to lock in concessions under the old system.
Self-employed get more from super	Self-employed people will be able to claim a full deduction for contributions they make to a super fund.	Currently the self-employed can only claim the first $5,000 and 75% of the remainder as a tax deduction.
Super looks better for the next generation	You're no longer forced to take your money out of a super fund at a certain age, usually 65. If you have sufficient other income you can leave your super to grow without having to make withdrawals.	With this change and the abolition of RBLs, your super can be paid to a dependant tax free on your death. Even to a non dependant, the tax rate will be no more than 16.5%.

Contents

Current issue

Past issues

	The first word
	Health news and views
	Get ready for spring… military style
	Body beautiful
	Rental nightmare takes its toll
	The china syndrome
	Putting the yum back into school lunches
	Great Aussie adventures
	Watch that car
	Business Bulletin
	Always read the label
	Fighting the free radical
	Something to talk about
	The no-waffle guide to Australia’s new super system
	Embarking on the big lap
	Understanding ovarian cancer
	Too much time on your hands?
	Breaking a taboo
	Village Volunteers
	Chinese medicine