Regardless of how you view the efficacy of the handouts in the Government’s recently announced economic stimulus package, millions of Australian tax-paying workers will gain a cash handout of up to $900 sometime in April. Many people will spend this bonus on essentials, some on discretionary items and some will save the money.
For all bonus recipients, the money is something of a windfall as it has come out of the blue. For the ‘savers’ (or if it is more stimulating—‘spenders with a time lag’), it may be possible to use this Government handout to gain another. If you are still working, have qualifying income and are under the age of 71 at the end of June 2009, then the Government Co-Contribution Scheme may provide the opportunity to turn this $900 into a savings benefit of up to $2,250, completely tax-free. The only catch is that money will have to pass through the superannuation system and so is subject to preservation rules and cannot generally be accessed until the investor reaches their preservation age, usually on retirement sometime after age 55.
Some people over age 55 will be able to gain the Government co-contribution and when received will still have unrestricted access to these funds as they may already be semi-retired and have satisfied a condition of release. Take, for example, the case of Mary, aged 66 and doing enough part-time work to satisfy the rules for making a contribution to super. Mary has an assessable income of $20,000 pa of which over 10% comes from eligible employment, so she can contribute the $900 to her super account and, on submission of her tax return, will be provided with a gift to her superannuation account from the Co-Contribution Scheme in the amount of $1,350. As Mary is over 65, all her super is accessible so she may withdraw the total funds, tax-free at any time.
The 10% rule mentioned above can be applied to determine whether someone is an employee or self-employed and the self-employed can now gain the benefit of the Scheme. The rule is that you must receive 10% or more of your total income during the year from eligible employment, running a business or a combination of both. Eligible employment generally means anything resulting in the person being treated as an employee. Although total income may include interest and dividend income, this is passive income and not counted as employment income. Anyone holding a temporary resident visa at any time during the financial year does not qualify under the Scheme.
As you can see above, one option for using this $900 is to accelerate your savings, take advantage of the Government Co-Contribution Scheme and the super vehicle so you have more to spend at a later date.
The Scheme is based on the Government providing a co-contribution of $1.50 for every $1.00 of personal or after tax contributions made to your superannuation account, up to a maximum of $1,000. The maximum co-contribution of $1,500 is available to persons with assessable income plus reportable fringe benefits of up to $30,342 pa with the Scheme providing no co-contribution when incomes exceed the maximum of $60,342 pa. The contribution you make to your super fund must be received in the fund by 30 June 2009 and must be an after-tax contribution, so salary sacrifice contributions do not count for the purposes of the Scheme.
The Scheme is based on assessable income and an important point to note here is that until June 2009, your income for the purposes of this Scheme will be your income reduced by super salary sacrificed contributions. For example, if you have a gross salary of $60,000 and salary sacrifice 50% of it to super, then your income up until June 2009 will be $30,000.
After 2009, super salary sacrificed contributions are proposed to be added back for the purposes of the Government co-contribution, many ATO rebates and Centrelink benefits.
In the next financial year the Government Co-Contribution Scheme is proposed to be directed as initially intended, to benefit the low and middle-income earners to build up their superannuation savings.
Disclaimer: This superannuation article is for general information only. It does not take into account your personal objectives, financial situation or needs. As a result, you should consider its appropriateness to your own situation and obtain independent financial advice before making any decisions about your superannuation.
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