1 Now and then Fallout from the Federal Budget SpeakerJulie Fox CompanyFirstTech Colonial First State Date22 November 2006

2 Disclaimer This presentation is given by a representative of Colonial First State Investments Limited AFS License (Colonial First State). The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation. This presentation is for adviser training purposes only and must not be made available to any client.  Colonial First State Investments 2006

3 Agenda Towards 1 July 07 – a technical perspective How will strategies change? Windows of opportunity Emerging opportunities

4 What to do this financial year… Understand the status of changes Statements of Advice - proposals v law Calculators / software assumptions Proposed transitional periods = windows of opportunity… Budget 9 May Sep 2006 Outcomes A bill by 7 Dec 2006 ? 1 July /2/07…29/3/07 Autumn sittings

5 Transitional periods Undeducted contributions (UDC) to super Transitional $1,000,000 UDC cap –10 May 2006 to 30 June 2007 –includes 65 – 75 year olds Should a client maximise UDC before 1 July 2007? If yes – how? Issues?

6 Maximising UDC now Possible strategies In-specie contributions to SMSF or wrap –What type of investments can be transferred? Borrowing to invest UDC –Is interest tax deductible? Preservation? Contribute beyond $1m and withdraw before 1 July 2007?

7 Maximising UDC now Sale of small business assets $1m transitional UDC cap PLUS $1m lifetime limit exemption from UDC cap –Proceeds from sale small business active assets (pre-CGT assets allowed) –Must qualify for 15-year exemption or $500,000 retirement exemption How much UDC could a couple contribute before 30 June 2007 under these rules? Issues?

8 Transitional periods Concessional deductible contributions (CDC) CDC cap $50,000 from 1 July 2007 Transitional CDC cap $100,000 –if age 50 or over –1 July 2007 to 30 June 2012 Should a client maximise CDC before 1 July 2007? If yes – how? Issues?

9 Maximising CDC Before 1 July 2007: Last chance for double deduction strategy Multiple employers – multiple aged based limit Salary sacrifice issues?

10 Transitional periods Complying pensions Purchased prior to 20 Sep 2007 –50% asset test exempt (age pension) –100% asset test exempt (aged care) Removal of exemption from 20 Sep 2007 –existing pensions retain exemption New pension standards from 1 July 2007 Should a client purchase a complying pension prior to 20 Sep 2007? Issues?

11 Example Grace – married homeowner SS Assessable assets: $600,000 purchased income stream Purchase complying pension now or purchase income stream after 20/09/07? Before 20/09/07 (50% exempt) $3 taper rate (now) $ $1.50 taper rate (post 20/09/07) $ Access to capital No After 20/9/07 (0% exempt) - $ maybe

12 Transitional periods Certain employer ETPs If: –existing employment contract at 9 May 2006 –employer payment prior to 1 July 2012 Then: cashed employer ETP $140,000 - $1,000,000 taxed at 15% or 30% Or: May be rolled into super until 1 July 2012 Windows of opportunity?

13 How will strategies change? Recontribution strategies –Pension phase v estate planning Transition to retirement Contribution splitting

14 Super v mortgage Example 50 year old paying off $300,000 over 10 years interest rate = investment return principle plus interest vs interest only plus salary sacrifice interest = $1,875 principle = $1,686 Tax rate16.5%31.5%41.5%46.5% Pre-tax cont available $2,019$2,461$2,882$3,152

15 Super v mortgage Tax rateSuper at 60Net benefit 16.5%$305,389$5, %$372,263$72, %$435,897$135, %$476,636$176,636

16 Super v mortgage Strategy also depends on investment returns vs interest rate Where is the break even point? Rough differentials only Tax rateApprox differential 15%Zero* 31.5%3.9% pa 41.5%6.7% pa 46.5%8.4% pa

17 Super v mortgage Issues with this strategy? Legislative risk Mortgage rate v fund earnings Uninsured risks – loss of salary / death

18 Windows of opportunity Maximising pre 83 Segregating fixed components prior to pension phase Consolidate v segregate? Overseas pension transfers

19 Questions and discussion Other emerging strategies you’ve heard about?