Source: Melbourne Investor Feb/March 2007

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Super Reform And Your Retirement

Source: Melbourne Investor Feb/March 2007

Written by John Short

Ord Minnett

John Short is a Representative of Ord Minnett Limited, AFS license 237121 and Ord Minnett Financial Planning Pty Ltd, AFS license 237122. This article contains general financial advice only and does not consider your personal circumstances.
 

Super Reform And Your Retirement

The Federal Government has announced a number of superannuation proposals which are intended to simplify and streamline the superannuation system.

This article is the first in a series of three which focus on some of the key outcomes of this superannuation reform. In particular this article concentrates on the simplified rules relating to contributions and the implications for retirement planning.

The superannuation measures proposed are increasingly likely to make the superannuation structure appealing for the accumulation of retirement savings and for the funding of cash flows in retirement.

The majority of the superannuation proposals are due to commence on 1 July 2007 (unless otherwise stated).

Simplified Superannuation Contribution Rules

We summarise below some of the major superannuation contribution reforms:

• $50,000 deductible contribution limit per person per financial year which will incur the 15 per cent contributions tax.
• Transitional period from 2007/08 to 2011/12 where people aged 50 or over could make deductible contributions up to $100,000 per person per financial year.
• $150,000 per person per annum personal undeducted contribution limit. This measure is
subject to a three-year averaging rule (ie. $450,000 over three year limit) for people under the age of 65. A work test applies for people between the ages of 65 to 75 (ie. 40 hours in 30 consecutive days).
• Transitional arrangements will apply from 10 May 2006 to 30 June 2007, whereby an individual will be able to make personal undeducted contributions up to $1 million during this period of time.
• Employer and personal undeducted contributions are allowed to the age of 75. Superannuation Guarantee Contributions are allowed to the age of 70.
• All contribution limits (except those related to transitional measures) will be indexed to average weekly ordinary time earnings (AWOTE) where the indexed amount is greater than $5,000.

Retirement Planning Implications of the Contribution Rules

The proposed contribution rules raise both short-term and long-term planning issues for individuals.

A key short term issue revolves around the $1 million transitional undeducted contribution rule from 10 May 2006 to 30 June 2007. Some individuals may need to consider:

• The redemption or in specie transfer of certain personal assets (eg. shares, property, interest earning assets) to superannuation. Capital gains tax positions and transactions costs (eg. stamp duty) also need to be taken into account.
• Borrowing to contribute to superannuation where certain assets (eg. investment property) may not currently be in a position to sell or where proceeds may not be received until after 30 June 2007. The interest on borrowing to contribute to superannuation is not tax deductible.
• The change from re-invested income distributions to the receipt of cash to provide ongoing funds for superannuation contributions.

Some individuals have been constrained from making superannuation contributions because of Reasonable Benefit Limit issues. The abolition of Reasonable Benefit Limits from 1 July 2007 (see next month’s article) releases this constraint.

As there may be changes to this information before the legislation is passed by Parliament please do not base your decisions on this information at this time. You should instead contact your adviser to discuss your personal circumstances.