Concessionally taxed contribution limits

If the proposed Federal Budget 2006 initiatives are passed into legislation then effective 1 July 2007, age based deduction limits will be replaced by concessionally taxed contribution limits of $50,000 pa, or $100,000 pa for those over age 50 (until 30 June 2012).

Deductible contributions up to the concessionally taxed contribution limit will be taxed at 15% upon entry into the fund. Contributions in excess will be taxed at 45%.

The current aged based contribution limits and the proposed concessionally taxed contribution limits are set out below.

Last Double Dip

The abolition of age-based deduction limits will effectively make the double deduction (double dip) strategy redundant by limiting the amount of concessionally taxed deductible contributions at fund level.

Therefore tax planning for the 2006/07 years should consider whether a taxpayer could structure their affairs to take advantage of a final ‘double dip'.

Deductibility of personal superannuation contributions

Subsection 82AAS(3) of the Income Tax Act provides that, where a taxpayer is engaged in eligible employment (that is the taxpayer can reasonably expect their employer/s to provide superannuation support with this income) and the assessable income and reportable fringe benefits from this employment is less than 10% of the taxpayer's total assessable income and reportable fringe benefits then the taxpayer may also make personal deductible superannuation contributions. This is referred to as the ten percent rule.

Taxpayers who are beneficiaries of trust distributions or can expect to receive company dividends or payments could potentially salary sacrifice their eligible employment income (generally PAYE) into superannuation and therefore reduce their assessable PAYE income to less than 10% of their total assessable income.

They would then be eligible to make a second age based deductible contribution.

For taxpayers currently aged 50 years or over they could potentially contribute over $200,000 into superannuation for the 2006/07 years using the double dip strategy.

Calculation of Deduction

The tax deduction allowed for deductible (personal) superannuation contributions under the ten percent rule is based on the taxpayer's age and is calculated by the formula:

$5000 + (75% of [contribution - $5,000]) to a maximum of their age-based limit

The anomaly with the formula is that you have to contribute more than the amount for which you can claim a tax deduction. The recent Federal Budget proposes to remove this anomaly, however the change will not take effect until 1 July 2007. The contribution in excess of the portion claimed as a tax deduction is treated as an undeducted contribution.

Excessive contributions post 1 July 2007

After 1 July 2007 a limit of $50,000 will apply to the total amount of concessionally taxed superannuation contributions per person each year. Deductible contributions in excess of $50,000 per year will be taxed at 45% upon entry into the fund.

Transitional arrangements allow those over age 50 to make concessional contributions of $100,000 until 30 June 2012.

From 1 July 2007 the top marginal tax rate will be 45% for income over $150,000 pa. Therefore it appears there is no disincentive for high-income earners on the top marginal rate from making personal deductible contributions over the concessional rate, as the client will be paying the top marginal rate in either case.

Therefore, if a taxpayer were to receive large distributions or dividends that pushed their income into the top marginal rate and they were eligible to make deductible personal superannuation contributions above the concessionally taxed limit ($50,000 or $100,000 depending on age) they could take the opportunity to make the contributions as they will not be disadvantaged from a taxation perspective, even though the excessive contribution will be taxed at 45% in the fund.

Equally, the Budget proposals will tax employer eligible termination payments at the highest marginal rate for payments over $140,000. Therefore, it may be more attractive for employers to make substantial superannuation contributions in lieu of golden handshakes and employer ETPs.