New 10% Rule reduces the concessional cap even lower
 

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Can Jim make a personal deductible contribution in 2009-10 financial year?
 
If Jim salary sacrifices $2,300 from his $10,000 salary, it will be included in the numerator only and not in denominator:
 
10,000 - 2300 + 2300 / 10,000 - 2300 + 70,000 = 10,000 / 77,700 = 12.87%
 
This means that Jim will not be able to make any personal deductible contribution for his rental income even if he decides to salary sacrifice all of his salary income because all the sacrificed income will be included only in the numerator.
 
This leads us to a situation where the maximum that Jim can contribute into superannuation is the whole of the salary which is $10,000 as salary sacrifice and $900 as compulsory SG contribution. Which means concessional cap for Jim is only $10,900 and not $25,000.
 
Further, Jim can achieve minimum taxable income of $70,000 and any income over the $35,000 will attract tax @ 30% + medicare levy. Jim will pay more tax.
 
 
 
What if Jim is over 55 years?
 
Assume the same figures as above and in addition to $10,000 salary Jim has a Transition to retirement pension from a superannuation interest of $400,000 (taxable component) and has similar rental income of $70,000. The question again is: Can Jim make a deductible personal contribution?
 
When Jim withdraws minimum amount of 2% of capital value of Pension $400,000 or $8,000?
 
The formula is:
 
10,000 (salary income)  / 10,000 (salary income)  +8,000 (pension) + 70,000 (rental income) = 11.36% which means that Jim cannot make any personal contribution as salary income is more than 10% of total assessable income.
 
 
When Jim withdraws $21,000*
 
10,000 (salary income) / $10,000 (salary income) + $21,000 (pension) + $70,000 (rental income) = 9.9%
 
Since the result is less than 10%, which means that Jim can make a personal contribution and if he contributes maximum, he will be able to contribute $49,100 and his taxable income can be reduced to $51,900* {$10,000 (salary income) + $21,000 (pension) + $70,000 (rental income) - $49,100 (personal deductible contribution)}
 
* Notes
(1) $21,000 pension income will be eligible for 15% pension rebate (2) $900 is being contributed by employer, hence only $49,100 should be the maximum personal contribution since Jim is over 50 years and the cap is concessional cap is $50,000 till year 2012 (3) Pension amount would have to be increased if Jim decides to make some salary sacrifice as the denominator will have to be adjusted by withdrawing more pension to compensate for the lower salary to keep the test percentage below 10 per cent.
 
Interesting point to note here is that if Jim is 55 and not on transition to retirement pension income - personal deductible contributions are not possible. Hence advisors should note that they must put their clients on pension if they turn 55 in year 2009-10 as the denominator has to be increased to ensure that the percentage remains below 10% (we need higher assessable income).

 

 

 

Other option is to reduce the numerator or reduce the hours you work (try suggesting to the client! - "Jim you will be better off, more money after tax, if you don't go to work" - sounds unrealistic).
 
 
What if Jim is over 60 years old?
 
The new definition of income stream incomes for those 60 years and over is that all payments are non-assessable which further erodes the value of the denominator, making a more stringent test.
 
When Jim withdraws minimum amount of 2% of capital value of Pension $400,000 or $8,000?
 
The formula is:
 
10,000 (salary income)  / 10,000 (salary income) + 70,000 (rental income) = 12.50% which means that Jim cannot make any personal contribution, since the pension amount is non-assessable and is not to be included in the denominator. You will have similar results even if Jim withdraws a higher pension amount as it will never be included in the denominator.
 
Conclusion is that Jim will not be able to contribute any deductible personal contributions due to his age. His taxable income will be $80,000 and will pay higher tax. Had he been younger (less than 60) as in the example above, he would have been able to better manage his tax situation.
 
The only solution to make a personal deductible contribution is to reduce working hours and ensure that income is lower than $7,000 or 10% of rental income.
 
This probably explains why many older medical doctors do not want to work extra hours as an employee. They earn personal services income and own many income producing assets in their own name where income cannot be reduced by personal deductible contribution.
 
If you have clients in this situation - the only solution is to sell these assets which are outside of super to your super fund (watch out for Sec 66 of SIS Act - what a super fund can acquire from members) or sell the asset to a third party and contribute non-concessional contributions into super provided capital gain tax can be managed.

 

 

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Conclusion
 
For some people, the new legislation will make it extremely difficult to meet the 10% rule and their concessional caps will be extremely low which is not good for their retirement. Another option is to gear in your SMSF.

 

 

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Opinion
 
 
In my opinion, super funds tax rates should be similar to individuals, lower contributions, up to $6,000, will not attract any tax and up to $35,000 tax will be only 15% and will also allow some individuals who earn more $80,000 to salary sacrifice instead of paying 38% to reduce it to 30% and those earning more than $180,000 instead of paying 45% may decide to pay only 30% by contributing $80,000 to super. 
 
Allowing everyone to contribute more and letting each taxpayer decide the tax they want to pay for today expenses and for tomorrow's savings is a better and an open fair system. This way savings will be higher and Australia will have more self funded retirees and the treasury will get their rate of tax from individuals either outside or inside super and the best part is that first $6,000 contributions to super will be tax free, which will help low income earners who have only the compulsory 9% SG contributions for retirement.
 
I do not understand why law makers are restricting taxpayers to contribute for their retirement or extracting excess contribution tax of 46.5% which in my opinion is daylight robbery, to have $100 in super one has to contribute $187 in super and then pay $87 in excess contribution tax (46.5%). I mean, they get $87 and I get $100 of my money! Does that sound right? I think it's not fair, at least not to my money.
 
 
If you like this article, please do not forget to forward to a friend.

By Manoj Abichandani SSA SSAud
SMSF Specialist Advisor
SMSF Specialist Auditor

 

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