The 1st of July not only marks the start of the 2012/13 financial year, but also a changing landscape for super funds. Here is a wrap of the new rules that are now in effect to ensure your SMSF stays up to date with the latest legislation.
1. Minimum pension for the year
Account based pensions, including transition to retirement (TTR) income streams, are required to meet minimum annual pension payments. The minimum factors depend on the opening balance of the pension and the age of the pensioner. The minimum pension for the 2013 financial year has been set at 75% of legislated minimums, as set out in the table below, to assist funds that continue to be affected by the Global Financial Crisis. This brings relief to those who have seen a downward shift in their super, as a greater amount can be retained in the fund to sustain their balance in a concessionally taxed environment.
* Note that the minimum amount may be pro-rated depending on the starting date of pension during the financial year.
2. Concessional contributions cap for over 50s reverting to general cap
The concessional cap for those aged over 50 is reduced from $50,000 to $25,000, bringing it into line with the general cap for all individuals.
This will affect all concessional contributions including salary sacrifice, TTR and personal contributions for which a tax deduction is claimed. Individuals need to be aware of their employer contributions to ensure that any contribution above this amount does not breach the $25,000 contributions cap. This may require downward adjustments to salary sacrifice strategies and a review of whether transition to retirement strategies are still beneficial under the reduced caps. The penalties for exceeding the cap will eliminate the tax concessions for concessional contributions.
The cap is scheduled to increase to $55,000 in 2014 for over 50’s with less than $500,000 in super.
3. Low Income Super Contribution (LISC)
Low income earners may receive the low income super contribution from 1 July 2012. LISC effectively returns the tax paid on concessional contributions by the super fund. The amount will be paid straight into super to directly boost retirement savings.
Low income earners are defined as individuals with an adjusted taxable income not exceeding $37,000. The individual must have concessional contributions for the year (which include employer-paid Super Guarantee contributions, salary sacrifice and personal deductible contributions), must not hold a temporary resident visa, and satisfy an income test in which 10% or more of their total income is derived from business or employment.
The amount of the low income super contribution is calculated at a rate of 15% of the total eligible concessional contributions for the year where the amount payable is $20 or more, up to a maximum payment of $500. It forms part of the contributions segment, and therefore the tax-free component of any super benefit. It is a different payment from the Government super co-contribution which is determined separately.
4. Government Co-Contributions
Note: The change in matching rate for the co-contribution has yet to be finalised.
The super co-contribution is a government initiative to help eligible individuals boost their super savings for the future.
Individuals earning up to $46,920 in the 2012/13 financial year will be entitled to up to 50 cents for every dollar of non-concessional contributions to their super fund up to a maximum of $500 a year. The maximum super co-contribution payable depends on the individual’s total income, and is payable to individuals who are under the age of 71 at the end of the financial year in which the contribution is made. For those aged 65 or over, the work test must also be satisfied. Further, individuals must meet the income test in which 10% or more of their total income is derived from business or employment.
The good news is that there is no need to apply. Eligible individuals who lodge their income tax return will automatically receive the co-contribution. The co-contribution effectively increases the contribution 1.5 times, meaning that more money is added to the super fund courtesy of the government as a reward for saving for their future. A great return on investment!
The following items are draft regulations and have not yet been legislated
5. Change to tax concessions for those earning over $300,000 a year
Concessional contributions tax will increase from 15% to 30% for people with income over $300,000. The definition of income includes taxable income, concessional superannuation contributions (both superannuation guarantee charge contributions and salary sacrifice contributions), adjusted fringe benefits, total net investment losses, target foreign income, tax-free government pensions and benefits less child support. Therefore employing TTR strategies, personal deductible contributions or salary sacrifice arrangements will not be effective in reducing taxable income for this purpose.
If an individual’s income (excluding their concessional contributions) is less than the $300,000 threshold, but the addition of their concessional contributions pushes them over the threshold, the reduced tax concession will only apply to the part of the contributions that are in excess of the threshold. Further, the reduced tax concession will not apply to concessional contributions which exceed the concessional contributions cap of $25,000 and are therefore subject to excess contributions tax, since excess contributions do not receive tax concessions.
The increased super contributions tax will still represent a saving of 15% (net of the Medicare levy) on concessional contributions to these individuals who are taxed at 46.5%, in addition to taxing earnings from investing those contributions at 15% instead of the individual’s marginal tax rate (MTR). Additionally when the fund is in pension phase, including TTR strategies, earnings on assets supporting the pension are tax free. This represents a significant tax saving compared to investments held outside of super. It is also interesting to note that the maximum additional tax impost from these changes for individuals contributing up to the $25,000 cap will be $3,750.
6. Regularly review investment strategy
SMSF trustees will need to regularly review their investment strategy over and above the previous requirement to formulate and give effect to their investment strategy. While there is no guidance on what ‘regularly’ means, it is assumed to be at least annually or more frequently depending on the type of investment.
7. Insurance requirements
SMSF trustees will be required to determine whether they should hold insurance cover for their members as part of establishing or reviewing their investment strategy.
8. Market value requirements
SMSF accounts will need to reflect the net market value of their assets for reporting purposes. This enables precise information about the funds financial positions. Net market value is the amount that can be received from the disposal of an asset in an orderly market after deducting costs incurred in realising the proceeds.
9. Assets separate
An SMSF must keep its assets separate from those of the trustee personally or standard employer sponsors, and their associates. The ATO will now be able to enforce this on trustees.
The super changes certainly keep us on our toes, so being aware of new legislation is the best way to be prepared and make the most out of your superannuation.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.
