Save For Retirement and Manage Your Tax Position

Published: 16 March 2007.

The Federal Government?s recent Budget announcements confirm that its intention is to simplify the confusing superannuation rules and reduce tax on super at retirement. What great news!

When this information is combined with the proposed reduction in income tax rates, it can provide a unique opportunity for self employed people to plan for their retirement and save tax.

Resident Managers usually operate as either a private company, a trust (sometimes both) or a partnership. Currently super contribution rules differ depending on the trading entity used, but this will change next financial year if the Budget announcements are enacted, as expected. For now, let?s look at the rules as they apply before 30th June 2006 for a couple employed by their own company (rules for self employed people are different, so seek advice).

The first rule to consider is that personal income tax is payable on salary or trust distributions at the marginal tax rate applicable. If, as expected, tax rates reduce next financial year then it makes sense to do what you can now to reduce taxable income or defer income to next tax year, if possible.

One simple way of doing this is by making company contributions to a director?s super fund. Most people are aware that 9% of salary must be paid to super, but additional amounts up to certain age based limits may be paid in addition. For example, anyone aged 50 or over can have tax deductible contributions made on their behalf of up to $100,000. This will probably change to $50,000 after 30th June 2006, so depending on your circumstances, there may be a ?one off? opportunity to build your nest egg and pay less tax.

The example below is for a Management Rights couple. In (A) an unplanned situation without super, the nett income is split between the Directors as salary ($50,000 each) attracting income tax (we?ve ignored compulsory super in this example). The surplus could be used to pay off a debt or invested elsewhere. In (B), the salary drawn is sufficient to pay living expenses but $39,358 has been invested in super. The result is that retirement funds are increased and this year?s income tax reduced.

Other reasons to talk to a financial advisor about your superannuation options: -

Co-contributions ? let the government pay into your super fund - If your yearly taxable income is between $28,000 and $58,000, you may be eligible for a contribution to your super from the government provided you are an ?employee? and make a personal contribution to your super.

Diversify your investments ? invest outside your business ? remember the old saying ? ?don?t put all your eggs in one basket?! Many self employed people invest only in their business and ignore other opportunities. One of the easiest ways to minimise investment risk is by ?Diversification?, so seek other opportunities.

Hide the money from yourself and watch it grow ? superannuation offers a planned approach to retirement savings and because money is ?preserved? there is less opportunity to spend it.

Consolidate smaller funds and track lost super ? many people have super all over the place ? sometimes in non-performing funds or with multiple management fees. It?s much more efficient to get all of your super together and working for you.

Portfolio management to maximise investment opportunities ? Whether you manage your own super fund or invest via portfolio of Managed Funds, returns can often be improved by active management and being aware of investment opportunities. For instance, now may be a good time to consider growth funds in the Asian region.

We welcome your call to discuss superannuation, taxation or other investment strategies.

Ian World, Chris Millington, Steven Chapman Phone 07 3832-3300
World Financial Management Pty Ltd

Licensed Representatives of Australian Financial Services
Please note that nothing in this article is to be taken as advice as it is of a general nature only. You should consult a financial planner prior to taking any action.