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What top executives can do with super before July 1

John Wasiliev

Company directors and senior corporate executives used to have it pretty good when it came to superannuation. For those close to retirement, the good old days still offer an important window of opportunity that closes on June 30, 2012, which may make it worthwhile to end work before then.

The good old days

Before the start of member-specific contribution limits in mid-2007, a director of companies that were not connected in any way could ask each of them to make a pre-tax or tax-concessional super contribution up to the age-related limit on offer at the time.

The limits were generous then: for someone 50 years and older in 2006-07 it was $105,113 a year.

While a director was entitled to just one contribution limit if the companies were connected, it was still better than the $50,000 a year that applies today for someone who is 50-plus (a maximum that is scheduled to reduce even further to $25,000 a year from July 1, 2012 for those with accumulated super savings of more than $500,000). A corporate executive, while entitled to only one limit unless they were also a director of an unconnected company, also did better in those days thanks to the higher cap.

A tasty leftover

But while the generous yearly limits are no longer, there is a vestige of the 2007 rule changes that means until June 30, 2012 – and under certain conditions, up to $1 million can be put into super that won’t count towards the pre-tax and post-tax contribution limits.

This involves golden handshakes (special payments over and above normal salary or fees) paid when a director or executive retires. Also described as golden parachutes, these payments recognise past service and are taxed under special termination payout rules, says superannuation lawyer Dan Butler of DBA Lawyers. Before June 30, 2007 they could be rolled into a super fund – often a DIY fund – a strategy that offered both tax and retirement benefit advantages.

Welcome redundancy

Further, both directors and corporate executives could receive tax-free retirement payments and super concessions if they were made redundant: a director redundancy could happen if the company merged with another and their position was eliminated; a corporate executive could see their position go in a restructure.

A redundancy situation can still arise today with part of any extra payment entitled to concessional tax treatment, according to a formula based on the years a director or executive has been serving. In the formula there is a base amount plus an extra amount for each year of completed service.

For the 2011-12 financial year, the base is $8435 and the per-year-of-service amount is $4218. A director with 10 years on a company board or an executive employed for a decade could be entitled to treat $50,615 as tax free ($8435 plus 10 times $4218).

2007 was a sad year

While tax-free redundancy payments are no longer allowed to be rolled into super, before mid-2007 any additional amount could be treated as a concessionally taxed super contribution rather than be taxed as a termination payment.

This concession was removed in mid-2007, when super’s focus switched from benefit limits to contribution limits. Termination payments could no longer be rolled into a super fund, with one exception: where the payment related to a current employment agreement (a more likely situation for a corporate executive than a director) it can still be transferred into super until June 30.

The $1m opportunity

The valuable concession under this entitlement is that it permits amounts of up to $1 million to be directed into super without counting towards the concessional or non-concessional caps.

This entitlement is important, as it may allow a larger amount to go into super. Under the rules in place until June 30, such transfers are known as directed termination payments and are generally taxed at 15 per cent in the fund.

If a directed termination payment contribution is greater than $1 million, any extra amount counts towards the pre-tax contribution cap. Amounts in excess of this cap then count towards the non-concessional or after-tax cap of $450,000 available to someone under age 65 who chooses to bring forward three years of $150,000 non-concessional contributions.

Where an eligible executive decides not to transfer a payment that could be directed into super and instead takes it as cash, how much tax they pay will depend on whether they are older or younger than the superannuation preservation age.

For someone over the current preservation age, the first $165,000 will be taxed at 16.5 per cent and the next $835,000 will be taxed at 31.5 per cent. Any payment above $1 million is taxed at the top rate of 46.5 per cent. These tax rates have taken a lot of the fun out of golden handshakes.

Where an executive is younger than 55, the first $1 million is taxed at 31.5 per cent and the balance at the top tax rate.

Essential documentation

The choice of transferring a termination payment to super, which runs out on June 30, 2012 is only available to those who are entitled to such payments under either a written contract or a workplace agreement that must have been be in force before May 10, 2006.

The opportunity for an executive to roll up to $1 million into super and merely be taxed at 15 per cent on the contribution to super is worth considering, says Butler.

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