Life after the Global Financial Crisis - Colonial First State

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FeatureToo much of a good thing?Don’t get caught out by contributing too much to super– you might lose more than you gain. Here are some waysto optimise your contributions.Last year approximately 40,000 peoplecontributed too much to their superannuation,with these excess contributions attractingup to 46.5% tax. While the Governmentencourages us to top up our super by offeringa favourable tax environment for supercontributions and earnings, it also sets a limiton the amount of contributions that can bemade to your super. So it appears that toomuch of a good thing can be bad for you.In the case of concessional contributions,which include the 9% super guarantee,salary sacrificed amounts, other employercontributions and personal deductiblecontributions, contributions over the limitattract a 31.5% penalty tax in additionto the 15% tax rate that applies to allconcessional contributions. By going overthe limit you miss out on most of the taxbenefits of making those contributionsin the first place.The most common mistake thatinvestors make is not being aware of exactlywhat contributions count towards the cap,or forgetting about the caps completely,says Colonial First State’s Head of TechnicalServices Deborah Wixted. “I know of aninvestor who was on a substantial salary.The client’s contributions comprised the 9%superannuation guarantee, salary sacrificecontributions and additional contributionsmade on his behalf by his employer to coverinsurance premiums. All these concessionalcontributions combined resulted inconsiderable excess contributions.”The ‘set and forget’ mentality – whereyou set up salary sacrifice arrangementsand leave them in place for years – can alsobe dangerous, warns Deborah. “For the2009–10 financial year, the caps are halfwhat they used to be. In preparation for this,the Australian Taxation Office (ATO) checked2008–09 financial year information andwrote to around 300,000 people warningthem that if they continued their currentcontribution pattern, they would be overthe limit in this financial year.”Contribution caps for 2009–2010Age (in theType of contribution financial year) Limit for 2009–10Concessional (beforetax) contributionsUnder 50 $25,000 pa (was $50,000) Indexed annually toAWOTE in $5,000 increments50 and over $50,000 pa until 30 June 2012 (was $100,000).From 1 July 2012, the indexed cap for under age50s will apply to everyoneNon-concessional(after tax) contributionsUnder 65 $450,000 over a three year period, using the ‘bringforward’ rule65 and over $150,000 paPeople under age 65 at any time in a financial year may effectively bring forward two year’s worth of entitlements ofnon-concessional contributions for that income year, allowing them to contribute a greater amount without exceedingtheir non-concessional cap.Top tax tips1Don’t get a nasty surprise at the endof the financial year: read on for somepossible ways to cut your tax bill.Top up your superSuperannuation is a tax-effective area for your money asearnings are taxed at a maximum rate of 15%. Earnings outsidesuper are subject to individual tax rates of up to 46.5%. Thereare good reasons to consider making additional pre and posttax contributions before the end of the financial year.Government co-contributionThe Government will match your after-tax contributions on adollar-for-dollar basis up to $1,000. If you are eligible, this is aneasy way to boost your retirement income on a yearly basis. Tofind out if you are eligible, speak to your financial adviser orvisit our website.Salary sacrificeTalk to your employer about contributing part of your salaryto superannuation directly instead of taking it as cash in hand.The amount you salary sacrifice is taxed at the super fundrate of 15% instead of your marginal tax rate, which could beas high as 46.5%.This may reduce your marginal tax rate and boost yoursuper balance.10 iQ colonialfirststate.com.au
FeatureIt also pays to be aware that any excessconcessional contributions are countedtowards your non-concessional cap.Deborah says that it’s not unknown forpeople to exceed both the concessionaland non-concessional caps, which couldresult in an effective 93% total tax onthe contribution.While there is scope to appeal to theATO if you exceed your contribution caps,it’s a challenging process to go through.So it pays to be aware of exactly what you’recontributing to your super each financial year.Another way to boost your superIf you want to boost your super but are waryof the contribution caps, you should speakwith your financial adviser. An example of analternative strategy is investing in a gearedshare fund. Colonial First State’s GeneralManager, Funding & Alliances, GrahamHand, explains that internally-geared fundscombine money invested by you withborrowings within the fund to get moremoney working for you.“If you invest $100 into a fund that isgeared at 50%, CFS will borrow an additional$100, and effectively invest the $200 on yourbehalf. It is only your contribution whichcounts against the contribution limits, notwhat ends up in the fund.” Other benefitsof gearing, which may include lowerfunding costs compared to margin loans,and franking credits received on the grossamount of assets, still flow through onbehalf of the investor, Graham says. Selfmanaged super funds can also choose thisinvestment option.Avoid the trapsCheck contributions madeto all of your super fundsIt is common to have a personal superfund and a work super fund, so it’simportant to check the contributionsfor all funds. You may like to considerconsolidating your super funds to makeit easier to keep track of all of yourcontributions.Different ages for differentcontributionsCheck the table across the page – you’llsee that depending on your age and thetype of contribution you are making,different limits apply.Don’t forget superguarantee contributionsAny contribution made to a superfund before tax counts as aconcessional contribution.This includes the superguarantee paymentsmade by youremployer, and any salarysacrifice contributionsyou have made.Take note of the dateof contributionsIf your salary sacrifice contribution wasnoted on your June payslip, it may nothave actually gone into your super funduntil July. Call your super fund to check.If you have your superannuation withFirstChoice, you can log into FirstNetInvestor to find out the date thecontributions were made.Make sure thepaperwork is rightIf you make a personal deductiblecontribution to your super, make sure youinclude your deduction in your tax return,and that the figure you include matchesthe figure in the deduction noticesubmitted to your super fund.2Split super contributions with your spouseContributions-splitting allows you to split certainsuperannuation contributions made during a financial yearinto your spouse’s superannuation account. There are a varietyof benefits, depending on your circumstances.3Spouse contributionsMaking after-tax contributions to your spouse’s super fundcan make you eligible for a spouse contribution tax rebate.Take advantage of the tax-free thresholdIf you wish to withdraw money from super when you retire,each spouse can take advantage of the tax-free threshold whichis currently $150,000 per person for 2009–10. So a couple canaccess $300,000 of taxable super benefit tax-free from age 55.Withdraw funds tax-freeA spouse who is under 60 could split taxable contributionsmade in the financial year to a spouse aged 60 or over. Thereceiving spouse could then withdraw the funds tax-free,assuming a condition of release was met (if they permanentlyretire for example).Find out moreSuperannuation can be tricky, so to make things a little clearerfor you we have included a ‘Super terms explained’ glossaryon our website. Visit colonialfirststate.com.au, click on ProductEducation/Superannuation.This article is not intended to be taken as taxation advice.We recommend you speak to your tax adviser as these tips maynot be relevant to your personal financial situation.colonialfirststate.com.au iQ 11
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Life after the Global Financial Crisis - Colonial First State

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