News 06/07

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

Crystallise your super benefits before 30 June 2007

In this e-SuperUpdate we look at new super rules and the crystallisation of the pre 1 July 1983 component prior to 30 June 2007.

What is Crystallisation?

Crystallisation allows those people with a benefit in a superannuation fund prior to 1 July 1983 the ability to increase their tax exempt (tax free) component prior to 30 June 2007.  This strategy could be attractive for those clients wishing to maximise their estate planning opportunities.

What makes up my Tax exempt component?

Your tax exempt or tax free component includes superannuation benefits/amounts that relate to your fund membership before 1 July 1983 plus any undeducted components/amounts.

How do I increase my tax exempt component?

The steps required to increase your tax exempt component is to:

Firstly

• Combine or rollover existing benefits to make sure your superannuation fund(s) have the earliest start date possible. (ie. Averaging your benefit over the period).

Secondly

• You are then able to take advantage of making undeducted contributions (personal contributions which are not tax deductible) to your superannuation fund prior to 30 June 2007.  This will result in further reducing the taxable component (post 1 July 1983 component).

You can only benefit from crystallisation if you use these strategies prior to 30 June 2007.  From 1 July 2007 lump sums will be divided into two components only, a tax free and a taxable amount, rather than the complex system of eight components we have now.

How can it be done.

Let’s look at James who is a member of two superannuation funds.  One fund has only a post 30 June 1983 component and in the other fund James has a pre/post 1 July 1983 component and undeducted contributions.  The start date of James’s superannuation benefit in the fund with the pre/post 1 July 1983 component is 1 July 1975.

By James combining his super benefits he is able to increase his exempt (pre 1 July 1983 & undeducted) components as follows:

If there were no further changes to James’ super fund as at 1st July his fund would consist of the following:

The components have been calculated based on James service date of 1st July 1975 which gives James 2,922 pre 1st July 1983 service days and 8,767 post 30th June 1983 service days. 

By combining the two superannuation fund benefits we can utilise James’s pre/post proportion which will increase his exempt component from $300,000 ($200,000 + $100,000) to $325,000 ($225,000 + $100,000).  This will give James an extra tax exempt amount of approximately $25,000.

The reason for the changes to the pre/post component is due to the apportionment of James’s superannuation benefit over his pre 1 July 1983 days divided by the total days he has been a member of the fund.

Adding an Undeducted Contribution:

By making an undeducted contribution to your superannuation fund prior to the 30th June 2007 you have the ability to increase your tax exempt (tax free) component and reduce your non exempt (taxable) component.

Now let’s look at what happens to James’s exempt component if he increases his superannuation by making an undeducted contribution of $500,000 before 30th June 2007:

As at the 1st July 2007 James’s fund will have the following components

If James combines the two funds plus makes an undeducted contribution of $500,000 his tax exempt component is now $950,000 ($350,000 + $600,000).

The reason for the changes to the pre/post component is due to the apportionment of James’s superannuation benefit over his pre 1 July 1983 days divided by the total days he has been a member of the fund.

By combining benefits and making undeducted contributions by 30 June 2007 this will give James an extra tax exempt amount of approximately $125,000.

From an Estate Planning point of view, James’s non dependents would only have to pay tax on the non exempt component or $450,000 rather than $600,000 should he pass away.

We recommend you seek structural planning advice tailored to your own SMSF and personal situations to ensure that you make the most of the benefits available.