Tax Strategies Tax Strategies for 2007for 2007

BRISBANE

SYDNEY

WOLLONGONG

MELBOURNE

ADELAIDE

Presented by Chris Wyeth BA LLB MTax DFP FTIARepresentative of TYNAN MACKENZIE PTY LTD AFSL 230764

www.tynanmackenzie.com.au

The information provided in this presentation includes general information about complex areas such as tax laws, markets and investing in securities. The information is current as at 6 June 2007.

In compiling the information, Tynan Mackenzie has not taken into consideration the investment objectives, financial situation or specific needs of any particular person. We caution you that, before making any decisions based on this information, you should consider with the assistance of an appropriately qualified and authorised adviser, whether the information is appropriate with regards to your particular needs, investment objectives and financial situation.

We would be delighted to offer you this assistance.

important notice

Tynan MackenzieFirm of Professional Financial Advisers

• established in 1994 by David Tynan

& James Mackenzie

• advising on over $3 billion

• long history of advising major companies,

government departments and universities

• highly qualified consultants with backgrounds

in accounting, law and financial services

• assisted by experienced support team

overview

• budget changes

• super changes – a refresher

• shifting assets to super

• tax deductible contribution strategies

• boosting tax free amounts in your super

• pension strategies while you work

• estate planning implications

budget changes + year end planning

• FY2008 – 15% MTR threshold increases to $30,000• $30,000 becomes new low threshold for reducing

income by tax deductible contributions to super• FY2009 – 30% MTR to $80,000

45% MTR to $180,000• reassess level of gearing as interest increases and

personal tax decreases

budget changes + year end planning

• deductions worth more this year - prepay expenses• change loans from variable to fixed and prepay (not

applicable to a line of credit) • pay deductible expenses & tax? (IT2582) from

investment debt – not on your home loan• employed spouse – wage plus super• borrowings to pay are deductible – use business

debt• co-contribution vs personal concessional

contributions

superannuation – phasesdeductible / employer /salary sacrifice contributions

Undeductedcontribution

Withdrawal0% / 16.5%

income stream

> 55 tax free $27k

>60 no tax

pension/ IS0% tax

0% CGTRefund 30%tax credits

15% Tax

0% Tax

accumulation15% tax 10% CGT

refund 30% tax credits

Pre 83 Post 83 Undeducted Contributions CGT Exempt Invalidity

rollover - no tax

contributions – new limits

Contribution FY2007 2008-12 2013+

Deductible / Concessional

Age based limits up to $105,539

<50 $50,000

≥50 $100,000$50,000

After tax / Non-concessional

$1 million from 9 May 2006

$150,000

$450k in 3 Yrs

$150,000

$450k in 3 Yrs

SB Assets $1 million $1 million $1 million

PI settlements Not capped Not capped Not capped

Overseas transfer

Counts to NCC limit

Counts to NCC limit

Counts to NCC limit

contributions – more please?

• Small Business CGT Retirement Rollover – gain only

• Small Business 15 year exemption – proceeds but

must retire

• in addition to the normal after-tax contribution limit

• pre-CGT business assets

• $1M lifetime limit (indexed)

• sale of chambers or other business assets

contributions – over the limit?

• excess concessional contributions ECC• ECCT at 46.5% and counts towards UDC cap• may pay from fund

• excess non-concessional contributions ENCC• ENCCT at 46.5%• must withdraw from the fund• blow both limits and pay 71.4% tax!

who can contribute?

Age < 65 65 - 74 75+

ConcessionalNo work

test

Work test(70+ from

1/7/07)

Mandated only

Non-concessionalUp to $450k No wk test if 63 or 64

40hrs/ 30days

Max $150k

No contrib’ns

spending your super

• when do I get access?• over 55 and still working • over 55 and permanently retired• retire from any employer after 60• reach 65

• do I have to start an income stream? NO• however pension may be better than accumulation

lump sums & tax

Current Component FY2008+ Classification

Pre June 1983

Tax free component- contributions segment- crystallised segment

Concessional

Undeducted contributions

Post 1994 invalidity

CGT Exempt

Post June 1983 Taxable component

Excessive component46.5%

No RBL’s!

lump sums & tax

• tax on lump sums from FY2008

Age <55 55 – 59 60+

Tax free Component

0% 0% 0%

Taxable component

21.5%Up to $140K – Nil

Over $140K - 16.5%0%

income streams

• No maximum payment (except NCAP)• New minimums

Age 55-64 65-74 75-79 80-84 85-89 90-94 95+

Current average

5.2% 6.6% 8.5% 10.5% 13.3% 16.6% 20.5%

New 4% 5% 6% 7% 9% 11% 14%

income streams - tax

Age 55 - 59 60+

Taxable Yes No

Tax free Yes Not applicable

Tax offset 15% Not applicable

strategies - shifting assets to super

• potential costs – CGT, stamp duty

• is it worth it? How long before you earn the costs back?

• sell assets with low CGT cost

• shift assets with no stamp duty – shares

• offset CGT with personal concessional contribution to super

strategies - shifting assets to super

• transfer assets in specie – beware of restrictions on acquiring assets from members

• Exception for business real property – wholly and exclusively used in a business – not necessarily your business

• asset transfers create tax – but no cash!• Individuals can choose to treat contribution as

concessional or non-concessional• Transfers from company or trust – tax at 15%! +

FBT?

strategies – pre-tax contributionsPractice income $150,000

Super contribution Nil

Taxable income $150,000

Income tax ($50,100)

Income $99,900

Net income + super $99,900

Net increase in wealth from salary sacrifice $7,950In FY2007 tax deduction = $5,000 plus 75% of balance so to achieve same deduction contribute $38,333

Practice income $150,000

Super contribution ($30,000)

Taxable income $120,000

Income tax ($37,650)Net income

$82,350

Super cont. $30,000Cont. Tax ($4,500)Net Super cont. $25,500

Net income + super $107,850

strategies – super vs home loan

• loan $400,000• salary $200,000• living costs $60,000• interest on home loan 7%• super earnings rate 8%• interest only repayments $28,000 pa• P&I repayments $4,700 /mth• loan term 10 years

strategies – super vs home loan

Investment Capital

-$400,000

-$200,000

$0

$200,000

$400,000

$600,000

$800,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Year

Cap

ital

Total P&I redn today's $ Total sal sac today's $

strategies – super vs home loan

• funds committed once in super• ensure other source of liquidity – include transition

to retirement pensions• immediate tax saving and tax free income on

withdrawal• ongoing after tax cost• consider duration, age and risk profile

strategies – borrow for super?

• defer sale of asset – better price or lower tax?• unable to contribute in the future - age 65 & unable

to work?• proceeds of sale will exceed the lower contribution

caps for FY2008 and beyond?• short term interest cost vs longer term tax savings

strategies – boost tax free $

• amalgamate super with pre-1983 start date• 2 funds - $1 million started 1990

$10,000 started 1971 – tax free amount $3,333

• new tax free amount increases to $336,564

• contribute $200,000 after tax• new tax free amount increases to $603,211

strategies – contribution splitting

• direct super to spouse who can access earlier or access tax free

• increase Centrelink payments• steer super away from potential estate challenges

strategies – co-contributions

• $1,000 after tax contribution = max $1,500 payment• above $28,000 assessable income + RFB payment

is reduced• phase out at $58,000 • salary sacrifice can help you reduce income to the

range where you receive co-contribution• self-employed are eligible from FY2008

– test = assessable income – business deductions

Strategies – transition to retirement

• Case study• Fred Follower 60• earns a net $250,000 at the bar• invest $500,000 in either shares or property (with

$400,000 borrowed funds) • $650,000 in super• $1 million home with $300,000 mortgage• needs $80,000 pa living costs

strategies – transition to retirementPractice earnings $250,000

Rent @ 2.5% $12,500

less

Super contribution $4,000

Income tax $85,388

(Super contb’n tax $600)

Interest cost $52,500

Reduce home loan $40,000

Net cashflow $80,148

Practice earnings $250,000

Divs @ 4.0% $20,000

TTR Pension $65,000

less

Super contribution $100,000

Income tax $41,439

(Super contb’n tax $15,000)

Interest cost $52,500

Reduce home loan $60,000

Net cashflow $80,061

strategies – transition to retirementNet property $130,000

Super $700,445

Home loan ($260,000)

Total $570,445

Net shares $130,000

Pension $637,000

Super $91,120

Home loan ($240,000)

Total $618,120

• shares provide better after tax yield - diversify• net improvement of $47,675 in year 1• improves with saving on home loan interest• creates long term wealth in tax-preferred

environment

strategies – transition to retirement

• replace taxable income with tax-free pension income + tax offset

• but no access to lump sums• best after 60• is one partner retired?• start normal income stream in that person’s name• is your super in the right persons name?

strategies – income streams

• example of long term effect of proportionality

• $500,000 invested in AP on 1 July 2006

• after tax contributions of $200,000 in the AP

• assume reset tax-free at either 55 or 60

• assume either no Pre-83 service or ESD of 1 July 70

strategies – income streamsTax Free Component

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81

Age

Inco

me S

tream

cap

ital

IS Balance TF$ reset 55 TF$ reset 60 TF$ Pre83 55 TF$ Pre83 60

strategies – income streams

• clients with pre-83 start date or tax-free amount benefit from starting pensions

• 0% tax in fund• Grow the tax free amount• separate taxable and tax-free monies into different

funds?– may increase the tax free amount for withdrawal– but government may legislate against this

questions?

• Chris Wyeth 3223 9377 chrisw@tynmack.com.au