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Now and then Fallout from the Federal Budget

Speaker Julie Fox

Company FirstTech

Colonial First State

Date 22 November 2006

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DisclaimerThis presentation is given by a representative of Colonial First State Investments Limited AFS License 232468 (Colonial First State). The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on 13 13 36.

The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation.  

This presentation is for adviser training purposes only and must not be made available to any client.

Colonial First State Investments 2006

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Agenda

• Towards 1 July 07 – a technical perspective

• How will strategies change?

• Windows of opportunity

• Emerging opportunities

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What to do this financial year…

• Understand the status of changes

• Statements of Advice - proposals v law

• Calculators / software assumptions

• Proposed transitional periods = windows of opportunity…

Budget9 May 2006

5 Sep 2006Outcomes

A bill by7 Dec 2006 ? 1 July 2007

6/2/07…29/3/07Autumn sittings

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Transitional periods

Undeducted contributions (UDC) to super

• Transitional $1,000,000 UDC cap– 10 May 2006 to 30 June 2007– includes 65 – 75 year olds

• Should a client maximise UDC before 1 July 2007?• If yes – how? • Issues?

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Maximising UDC now

Possible strategies

• In-specie contributions to SMSF or wrap– What type of investments can be transferred?

• Borrowing to invest UDC– Is interest tax deductible? Preservation?

• Contribute beyond $1m and withdraw before 1 July 2007?

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Maximising UDC now

Sale of small business assets

• $1m transitional UDC cap PLUS

• $1m lifetime limit exemption from UDC cap– Proceeds from sale small business active assets (pre-CGT

assets allowed)– Must qualify for 15-year exemption or $500,000 retirement

exemption

• How much UDC could a couple contribute before

30 June 2007 under these rules?• Issues?

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Transitional periods

Concessional deductible contributions (CDC)

• CDC cap $50,000 from 1 July 2007

• Transitional CDC cap $100,000– if age 50 or over – 1 July 2007 to 30 June 2012

• Should a client maximise CDC before 1 July 2007?• If yes – how?• Issues?

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Maximising CDC

Before 1 July 2007:

• Last chance for double deduction strategy

• Multiple employers – multiple aged based limit

• Salary sacrifice issues?

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Transitional periodsComplying pensions• Purchased prior to 20 Sep 2007

– 50% asset test exempt (age pension)– 100% asset test exempt (aged care)

• Removal of exemption from 20 Sep 2007– existing pensions retain exemption

• New pension standards from 1 July 2007

• Should a client purchase a complying pension prior to 20 Sep 2007?

• Issues?

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Example• Grace – married homeowner

• SS Assessable assets: $600,000 purchased income stream

• Purchase complying pension now or purchase income stream after 20/09/07?

Before 20/09/07

(50% exempt)

$3 taper rate (now)

$321.20

$1.50 taper rate

(post 20/09/07)$374.45

Access to capital No

After 20/9/07

(0% exempt)

-

$149.45

maybe

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Transitional periods

Certain employer ETPs

• If: – existing employment contract at 9 May 2006– employer payment prior to 1 July 2012

• Then: cashed employer ETP $140,000 - $1,000,000

taxed at 15% or 30%

• Or: May be rolled into super until 1 July 2012

• Windows of opportunity?

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How will strategies change?

• Recontribution strategies– Pension phase v estate planning

• Transition to retirement

• Contribution splitting

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Super v mortgageExample

• 50 year old paying off $300,000 over 10 yearsinterest rate = investment return

• principle plus interest vs interest only plus salary sacrifice interest = $1,875principle = $1,686

Tax rate 16.5% 31.5% 41.5% 46.5%

Pre-tax cont available

$2,019 $2,461 $2,882 $3,152

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Super v mortgage

Tax rate Super at 60 Net benefit

16.5% $305,389 $5,389

31.5% $372,263 $72,263

41.5% $435,897 $135,897

46.5% $476,636 $176,636

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Super v mortgage• Strategy also depends on investment returns vs

interest rate

• Where is the break even point?

• Rough differentials only

Tax rate Approx differential

15% Zero*

31.5% 3.9% pa

41.5% 6.7% pa

46.5% 8.4% pa

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Super v mortgage

Issues with this strategy?

• Legislative risk

• Mortgage rate v fund earnings

• Uninsured risks – loss of salary / death

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Windows of opportunity

• Maximising pre 83

• Segregating fixed components prior to pension phase

• Consolidate v segregate?

• Overseas pension transfers

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Questions and discussion

Other emerging strategies you’ve heard about?