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Self Managed Super Fund (SMSF) Article
The Importance of a Long Service Period
By Tony Negline.
This article may be out of date.
24th August 2005
Taken at face value, there seems little reason to keep bits of paper, like old member benefit statements, that lost their usefulness years ago .
Keeping all superannuation records is very important because you never know when some tiny spec of information might give you to a tax concession that otherwise you would not be allowed.
The most common example of small pieces of information playing a big part in improving the tax efficiency of a person's investment is the 'eligible start date' (ESD).
In particular the ESD is very important for anyone who was working before July 1983. Why this date? Well from 1 July 1983, the tax rules that apply to certain benefits paid on the termination of employment or from a super fund were changed. The net effect was a greater level of taxation on benefits paid.
To reduce the political impact of the changes, the government of the day decided to keep the old rules in place for the proportion of a benefit that related to 'service before July 1983. We commonly call this 'grandfathering' – that is, keeping an old rule in place.
The portion of a benefit taken as a lump sum that relates to pre-July 1983 service has some significant tax concessions compared to the tax regime that applies to service that relates to post-June 1983 service.
Accessing the pre-July '83 tax concessions is essential if an investor wants to maximize their retirement planning opportunities.
Understanding what your eligible start date is therefore the key to knowing whether you have access to this tax concession. You ESD is the earlier date between two dates:
- the date you commenced employment with an employer who first made superannuation contributions for you and you still have some of those super assets
- the date you first made super contributions for yourself.
And it is here that good record keeping, and sometimes a good memory, can be very handy.
Take the example of Jeff Perkins. He is sixty and about to retire. He has been a self-employed professional for nearly all his working life, and he didn't begin making super contributions for himself until after June 1983 so he is almost certain that he doesn't have any pre-July '83 service. A pity because he started work in the late 1960s.
After some prompting, Jeff recalls that between the end of university and starting his own business he was a state public sector employee from 1969 to 1972.
For over a hundred years most public servants have had some superannuation. In the past most public sector fund members who were leaving before retirement age weren't allowed to take their super benefit. Their benefit had to stay in the fund and could only be taken when they genuinely retired.
Jeff checked a few lost member registers – one with the Australian Taxation Office and the other with his State Government's Treasury office. Lo and behold, there he found a benefit of $1,200 waiting to be collected. And what ESD did it have? 1969.
He transferred this benefit into his main super fund where he has $600,000. By doing this Jeff moved his eligible start date on all his super from after June 1983 to early 1968.
The after-tax benefit to him is enormous. Before Jeff found his lost super, he would have paid over $77,500 tax if he withdrew that $600,000 as a lump sum. (The tax is nil for the first $129,751 and then 16.5% of the balance.)
Now that he has the 1969 eligible start date, about 40% of his benefit will be taxed as a Pre-July 1983 component. Only five percent of these benefits are taxed at Jeff's marginal rate. If we assume that his marginal rate is 48.5% then the total lump sum tax upon withdrawal is reduced to under $45,000.
(The amount of tax shown here assumes that Jeff hasn't taken, as a lump sum or pension, any other super benefits after July 1990.)
This is a considerable saving and wouldn't be available if Jeff didn't combine his total super assets. Clearly it is very important that superannuation investors who have Pre-July '83 service ensure that some of the pre-July 1983 service money ends up in all their superannuation accounts.
On the face of it, there are no tax concessions for Jeff to combine his lost super monies and other super if he merely intends to use his super monies to take a pension. But if Jeff purchases an allocated pension with his $600,000 then takes a lump sum withdrawal, some of the money will have Pre July 1983 component and will therefore be concessionally taxed. If the money is not combined this concession would be lost. So even if no lump sums will be taken, Jeff needs the longest ESD possible because it gives him lots of flexibility which is very important to retirees.
Often investors have very old superannuation whole-of-life or endowment policies that were really life insurance policies with a small savings element in them. Lots of these policies were sold by traveling salesmen. Most people have forgotten about these policies but if they can be found and the account balance – no matter how small – retrieved, great long term benefits might be achieved including a pre-July 1983 eligible service date.
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