YourGuardian: November 2003 edition

Contents

1. Telstra buy-back
2. Legislation update
   • Co-contributions
   • Reduction in the Super Surcharge
   • Choice of Super
   • Splitting of contributions

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TELSTRA BUY-BACK

Many people became first time investors in the share market with the Telstra 1 and Telstra 2 floats. With the current buy-back offer from Telstra, there are many investors now faced with the decision of whether or not to offer their shares for sale under the buy-back arrangement and if so at what price.

Because of the way the buy-back is structured, a large component of the buy-back price represents a fully franked dividend therefore this can provide significant tax benefits for anyone paying tax at a low rate (below 30%). For example, self managed super funds pay tax on their investment earnings at a rate of 15%. Often this rate can be even less where the investment income includes fully franked dividends.

The following table illustrates the potential tax benefits available for a super fund that holds 10,000 Telstra shares which were purchased in the Telstra 2 float at a price of $7.40 per share.

The net overall benefit includes a refund of tax credits on the fully franked dividend and assumes that the super fund will be able to use the capital loss resulting from the buy-back to reduce tax on capital gains in the future.

The above table presents the minimum tax benefits available assuming the lowest possible price under the buy-back of $4.20, compared to the estimated market price at the time of the buy-back of $4.70. If the buy-back price is greater than $4.20 then the tax benefits may be even higher.

Please note that the tax benefits are only one issue to be considered when deciding whether to participate in the buy-back. We therefore recommend you consult with your investment advisor regarding your own circumstances before making a final decision. Tenders for the buy-back offer close on 21 November 2003.

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LEGISLATION UPDATE

The long awaited legislation relating to co-contributions of super for low income earners and a reduction in the superannuation surcharge has finally been passed by Parliament.

Co-contributions

The co-contributions legislation will provide a low income earner up to $1,000 extra superannuation payable by the Government, as long as they make a personal contribution towards super themselves from 1 July 2003.

To be eligible, you must first be an employee who has an employer paying the compulsory 9% super on your behalf. You must then make a personal contribution towards super from your after tax income (i.e. you must not be eligible for a tax deduction for the contribution you make).

To receive the additional super from the government, your assessable income including any reportable fringe benefits provided by your employer needs to be less than $40,000. If your assessable income is less than $27,500, the government will match the total contributions you make, dollar for dollar, up to a maximum of $1,000.

Where your assessable income is between $27,500 and $40,000 the maximum amount the government pays as a co-contribution towards your super reduces by 8 cents for each dollar of income above $27,500.

One advantage of the co-contribution is that it will be treated as an undeducted contribution by your super fund. This means that it will not be subject to tax when received by your fund, and it will also be tax free when paid to you on retirement.

For families that operate a business through their own company or trust, there may be some tax planning opportunities available to take advantage of the co-contribution. It would therefore be worthwhile giving some consideration to this well before 30 June 2004 - $1,000 may not seem like a lot of money to some, but every little bit counts!

Reduction in the Super Surcharge

From 1 July 2003, the super surcharge will reduce gradually over 3 years from 15% to 12.5%. Whilst it does not represent a large reduction, any decrease in the surcharge payable is welcome.

The applicable super surcharge rate payable for each of the next 3 years will now be as follows:

• Year ended 30 June 2004: 14.5%
• Year ended 30 June 2005: 13.5%
• Year ended 30 June 2006: 12.5%

For the current financial year, the full surcharge of 14.5% is payable on the amount of any super contributions made to your super fund that have been claimed as a tax deduction by either yourself or your employer, but only where your total 'adjusted taxable income' is greater than $114,981.

The surcharge reduces by 1% for every $1,355 below $114,981, until your adjusted taxable income reaches $94,691. Below this amount there is $Nil surcharge payable.

Adjusted taxable income generally represents your taxable income as per your tax return lodged, plus any reportable fringe benefits included on a payment summary from your employer. Certain termination payments are not included in determining your adjusted taxable income.

Choice of Super

The legislation to allow employees to choose where their employer pays their compulsory super is still before Parliament. Whilst this proposal has been around now for a number of years, albeit in different forms, it was reintroduced on 27 June 2002.

There are still many issues that need to be addressed, in particular ensuring that employers are not burdened with extra costs and administration. The government has decided to defer the start of this legislation, if passed, until 1 July 2005 to enable employers time to prepare.

Splitting of contributions

Draft legislation is currently before Parliament proposing to allow a member to split superannuation contributions made to their super fund with their spouse. The draft regulations provide that up to 70% of a member's deductible contributions may be split with their spouse once received by their super fund. Up to 100% of any undeducted contributions made to the fund may be allocated to a spouse.

The member must apply in writing to the trustees of their super fund and nominate how much of super contributions made in the prior year they wish to allocate to their spouse. The member must also provide details of how the contributions are to be allocated to their spouse. For example, whether they are to be allocated to an existing member account or new member account within the super fund or transferred to another super fund.

The aim of the proposal is to provide couples with one main income-earner, access to the Reasonable Benefits Limit and Tax- Free/Low-Rate Thresholds for Eligible Termination Payments, for each spouse. The proposed start date for the legislation is 1 July 2004.