Financial Planning News

The dramatic overhaul of the super tax laws by Federal Treasurer Peter Costello in the May budget means everyone contributing to super - and looking for a tax-advantaged investment - should be reviewing their arrangements and contribution strategies.

For people planning to contribute significant after-tax or undeducted contributions into super in the near future the news that the tax on benefits had been abolished from July next year was bitter sweet.

Abolishing the tax is a masterstroke in terms of simplifying the system. But the benefit is not that great if your super account balance is low - perhaps because you were concerned about locking up substantial assets too far out from retirement.

So the challenge has suddenly changed: how to get as much money in under the super tax shelter. By capping the after-tax contribution level immediately at $150,000 a year the Government has significantly restricted people's ability to get money into the super system by way of post-tax lump sums. The restriction is for good reason because the amount of money that would have moved into super otherwise would have been dramatic.

The devil is always in the detail and this week the federal government announced some transitional measures for its $150,000 contribution cap that mean people able to act before the end of the financial year can effectively get a full year's contribution allowance for the six or so weeks between the budget announcement and the end of the financial year.

Alternatively you could take advantage of the transitional averaging contribution rules that allow you to contribute $450,000 in any one year and then average it over three years.

Other options announced by the Treasurer's office include contributing $150,000 before June 30 this year and then a further $450,000 in July. But then you have hit the maximum limit and cannot make any more undeducted contributions until after June 30 2009.

The final option is to contribute $150,000 a year for the next four years. Either way you get $600,000 into super but the advantage of doing it earlier is that earnings are taxed at the lower 15% rate rather than marginal rates.

All of this makes a mockery of the notion that the new simpler super regime will suddenly render financial planners obsolete. More likely is that for at least the next 12 months financial planners will be in overload as clients rethink their situation and retirement savings strategies.

In all the excitement about the new super rules it is also worth remembering two other basic but worthwhile super tax measures - the co-contribution and spouse contribution.

The maximum co-contribution is available if you or a spouse earn less than $28,000 and can contribute $1000 to super. Do that and the government will top it up with a maximum of $1500. The government scales back its contribution on earnings above $28,000 and stop once you earn $58,000 a year.

Spouse contributions are another way of boosting super savings while getting a tax deduction. If you contribute up to $3000 into your spouse's account you can claim a tax rebate up to $540 although your spouse has to earn less than $10,800 for the full tax rebate to be paid.

The tax clock may be counting down on this financial year but Treasurer Peter Costello has ensured super will be top of the tax planning hit list for this and many years to come.