Topic 8 – Tutorials SolutionsSuperannuation SolutionsQuestion 1(a) What is the difference between a concessional and a non-concessional contribution?A concessional contribution is where a tax concession has been claimed –effectively theindividual is streaming some of their income into superannuation and not paying (income)tax on that money.A non-concessional contribution is where a tax concession has not been claimed –effectively the individual is moving some of their capital into superannuation.There are prescribed limits on both of the above as to the maximum amounts that can beclaimed(b) What are the different tax consequences when these contributions enter thesuperannuation fund?Concessional contributions are taxed at 15% when they enter the fund.Non-Concessional contributions are not taxed when they enter the fund.Question 2(a) Explain to Jess the concessional contribution limit and what type of contributions areconcessional contributions?The concessional contribution limit is $25,000. Concessional contributions are employer SGcontributions and any salary sacrifice amounts by the employee. So the SG contributions thatJess’s employer is making is already consuming some of this limit.Jess must ensure that any concessional contributions she makes, whether they are personalcontributions or salary sacrifice contributions, that when combined with the employer SGCthey total less than $25,000. From the 2018/19 financial year Jess is able to access anyunused concessional contribution cap from previous years on a rolling five year basis –commencing with any unused cap from the 2017/18 financial year.(b) Assume that Jess’ salary is $57,000 p.a. and her employer makes the minimum SGcontributions. How much can salary sacrifice in superannuation?Her employer is contributing at 9.5% p.a. SalaryCompulsory superannuation rateEmployer contributions ($57,000 X 9.5%)Concessional Contribution capRemainder$57,000.009.5$5,415.00$25,000.00$19,585.00 (c) Calculate how much tax will Jess save by $10,000 salary sacrificing?Before Salary sacrificeTaxable income (Salary) $57,000.00Tax ($5,092 + (32.5% * (57000- 45000)) $8,992.00Medicare (2% of taxable income) $1,140.00Minus LITO (Low income tax offset)($325 minus (Taxable Income minus $45,000) x 1.5%))$145.00Minus LMITO (Low & Middle income tax offset) $1,080.00Total Tax $11,357.00After Salary sacrificeTaxable income(Salary-salary sacrifice)($57,000 – $10,000)$47,000.00Tax ($5,092 + (32.5% * (57000- 45000)) $5,742.00Medicare (2% of taxable income) $940.00Minus LITO (Low income tax offset)($325 minus (Taxable Income minus $45,000) x 1.5%))$295.00 Minus LMITO (Low & Middle income tax offset)$255 plus 7.5% of income above $37,000Income taxTax on contribution (10,000 * 15%)Total TaxTax reduction ($11,357.00 minus $9,482.00)$1,005.00$7,982.00$1,500.00$9,482.00$1,875.00 (d) Can Jess wait until April/May when she has a clearer idea of how much she will earn in thefinancial year before implementing her salary sacrifice strategy?The decision to salary sacrifice must be made prospectively not retrospectively. If inApril/May Jess finds that she needs to salary sacrifice another $10,000 it is unlikely that shewill earn enough income at the costume shop before the end of the financial year to allow thisto happen.If Jess finds it too late in the financial year to make a prospective salary sacrifice she can stillmake a personal concessional contribution to superannuation and claim the tax deductionprovided she has the cash resources available.(e) How much can she contribute as a non-concessional contribution?Non Concessional Contribution of $100,000 pa.She can bring forward 2 years of future contributions. This is $300,000 (100,000 + 100,000 +100,000) for the next 3 year. No more NCC contributions are allowed until 3 years have expired.Question 3Your employer is offering you the option of transferring your funds from the defined benefitsuperannuation fund to an accumulation superannuation fund.(a) Explain the difference between a defined benefit fund and an accumulation fund.(a)Defined benefits scheme-operated by large employers and public sector funds-benefits determined by:the amount of the members salary at a particular date, being the date of the members terminationof employment or retirement or an earlier date, or the members salary averaged over a periodbefore retirement multiplied by a specified amount .Examples: 5 times salary at date of retirement15% of final average salary for each year of service with the company. After 30 years service –15% x 30 years x final average salary. The multiple of 15% is determined by the fund rulesAccumulation fund-final benefit payable is the amount accumulated in the fund in respect of the member. (employeecontributions, employer contributions, fund earnings)(b) In determining which is the better type of fund, the member would need to determinewhich would give them the highest payout under their particular circumstances-under a defined benefits scheme, generally the longer the member remains with the employer,the more attractive the payout.-establish risk profile of client:with a defined benefit fund, the investment risk lies with the employer:with an accumulation fund, the investment risk lies with the employeeQuestion 4Janet has been working for the past 15 years and has accumulated balances in foursuperannuation funds totalling all up $220,000. All funds are invested in conservative assetclasses earning relatively low returns. Janet is 52 now and is looking at retiring at age 60.Her plans at age 60 are to withdraw all funds, and purchase an expensive new car, go on anextended overseas holiday and then apply for the old age pension. Her other assets consist of$20,000 held in a cash management trust and $50,000 held in debentures. Janet has a wellpaying job but also has been living an expensive lifestyle.(a) What would your advice be to Janet in respect of her superannuation and plans for thefuture?Issues to consider:• Could Janet live off the Age Pension considering her expensive lifestyle? She will not beable to access it until she is 67 (as she was born in 1967) so she has a 7 year gap if shespends too much now• At age 60yrs Janet will not qualify for Age Pension for at least another 7 yrs.• If Janet does not work she will be drawing down her super or Income Stream most likelyquite significantly• Janet in incurring unnecessary administrative fees by having funds over 4 funds.Funds should be accumulated• Janet still has 8 years until retirement and therefore would be advised to invest into morehigh growth asset classes (perhaps 60% in growth assets) that produce higher returns• In order to maximise superannuation fund balance, Janet would be advised to transfersome of her current investments (where she would be paying tax at her marginal tax rate)into her superannuation fund.• Is buying a car and holiday good use of her savings?• Perhaps home improvements or purchasing a home would reduce assets to maximisepension
