TechWrap. April The month that was... Contents: March saw the Federal parliament fixated on the Government s new health plan.

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1 TechWrap April 2010 The month that was... March saw the Federal parliament fixated on the Government s new health plan. Contents: Year-end planning: Claiming a tax deduction for personal super contributions Cooper phase 2 preliminary report Tax system improvements Underinsurance report ASIC review of term deposit market Social security rates increase Changes to super borrowing requirements Tax agent visits for SMSFs After some interesting parliamentary tactics from the Government, we saw PM Rudd and the opposition leader Tony Abbott battle out the issue via a nationally televised debate. If the Government s aim was to draw attention to the health issue and arrest the previous leap in the popularity of new opposition leader, it appears to be working. The latest polls saw Mr Abbott s approval ratings plummet. (I wonder whether the pictures of Abbott completing his iron man challenge will have any effect on the next polls to be released.) With the resignation of the Opposition Senate Leader, Nick Minchin, Mr Abbott also had a minor re-shuffle of the Shadow Ministry. Most notably, Barnaby Joyce was moved from the Finance portfolio to Regional development, Infrastructure and Water. Andrew Robb was appointed to the role of Shadow minister for Finance. Will April be the month that the Henry report is finally released to the public? Treasurer Swan conceded on ABC s Insiders program that it would be released by the Federal Budget, due to be handed down on 11 th May. Fingers crossed that it will not be left until the last minute before the Budget. ATO warns against circumventing excess contributions tax Legislative update

2 Page 2 Year-end planning: Claiming a tax deduction for personal super contributions The following people are generally eligible to claim a tax deduction for their personal contributions:... can no longer salary sacrifice to meet the 10% test as RESC is now included... generally those with income less than $54,705 will be better off receiving a co-contribution on up to the first $1,000 of personal contributions self employed persons; substantially self employed persons (where the amount of income 1 they earn as an employee is less than 10% of their total income 1 from all sources, for the financial year in which the contribution is made); and persons who are not engaged in any employment activity. This continues to include anyone who is not employed and aged 18 to 64. Those under 18 at the end of the financial year cannot claim a tax deduction unless they earned income as an employee or business operator in that financial year. If you have clients who wish to claim a tax deduction for personal contributions to superannuation, now is the time to: determine what level of assessable income they have received and expect to receive during the financial year. This is important as their assessable income needs to be: o greater than any tax deduction they want to claim. If it s not the ATO will deny that part of the deduction that is greater than their assessable income; and o around $15,000 more than the total tax deduction the client wants to claim. Generally, no tax is payable on the first $15,000 of income when you take into account the low income tax offset. Therefore, reducing the client s taxable income below this level will result in the client paying more tax overall, when you consider contributions tax deducted within the super fund. ensure that any income attributable to employment is less than 10% of total income for the financial year. Remember the 10% test includes RESC 2 for this financial year as well as reportable fringe benefits and cash salary. This point is particularly important for those who, in previous financial years were able to salary sacrifice any income earned as an employee to ensure they met the 10% test. This is no longer possible; and consider whether they may be better off not claiming a tax deduction, or claiming a smaller deduction, in order to access all or part of a Government Co-contribution. Generally those with total income of less than $54,705 will be better off making a nondeductible personal contribution and receiving a co-contribution on up to the first $1,000 of personal contributions to superannuation. For more information on this refer to Strategy Paper: Super Co- contribution for employees. Further information on this topic can be found in Technical Bulletin Contributions: Tax deductions for personal super contributions 2009/10. 1 _ Total income or income includes assessable income, reportable fringe benefits and reportable employer superannuation contributions. 2_Reportable Employer Superannuation Contributions (RESC) are generally salary sacrifice contributions or amounts that the employee could have chosen to receive as salary and wages.

3 Cooper phase 2 preliminary report Page 3 On 22 March 2010, the Super System Review (Cooper Review) released its second preliminary report; SuperStream bringing the back office of super into the 21 st Century. The focus of this report was the operation and efficiency of the superannuation system. Key recommendations of the report include: introducing industry wide standards to improve the quality of data when members enter the system; ensuring better use of technology, including 'straight-through processing' (ie without human intervention); ensuring that e-commerce solutions replace current paper-based transactions; using the tax file number as a primary identifier for members throughout the super system; introducing easier consolidation of multiple member accounts; and ensuring simpler rollovers and consolidations by eliminating redundant processes. The review panel hopes its recommendations will provide clients with greater retirement savings through a range of cost saving measures as the recommendations, if adopted by the Government, will have significant impact on the administrative practices of superannuation funds. Below, we have outlined some of the implications for employers and individuals... putting the onus on the employer to provide the superannuation provider.with sufficient data Implications for employers The recommendations that will specifically impact on employers, if implemented, are: 1. Putting the onus on the employer to provide the superannuation fund or clearing house with sufficient data. The review has recommended that employers should only be deemed to meet their Superannuation Guarantee (SG) obligations if they provide the following information about employees to the superannuation fund or clearing house: a. full name b. date of birth c. current address d. the amount being contributed e. address and mobile phone number (if available) The report goes as far to suggest that penalties should be imposed on the employer where they fail to provide all of the required information. Where an employee does not give their employer the required information, the employer will be able to meet their SG obligations by sending the superannuation contribution to the ATO as unclaimed money. 2. Imposing a prescribed fee that is payable by the employer to the superannuation fund, where the employer chooses to remit contributions via cheque rather than electronically. 3. Require employers to remit salary sacrifice contributions on a monthly basis.

4 Page 4 Cooper phase 2 preliminary report, cont. 4. Establishing an ATO employment webpage to allow employers to submit the equivalent of a TFN declaration form electronically for new employees. At the same time the site would enable the employer to advise which superannuation fund contributions will be paid to for the employee. The ATO would then provide (electronically) new member details for the employee to the superannuation fund. Implications for individuals The following recommendations could assist or impact on individuals: 1. Allowing individuals to log into an ATO website which would display both a list of all superannuation funds of which they are currently a member, and all accounts which currently hold the member s TFN details; 2. Enacting legislation to permit a trustee to auto-consolidate superannuation accumulation accounts without prior reference to the member, where multiple accumulation accounts within a single fund share a common TFN and member surname; 3. When a superannuation fund or clearing house seeks to validate the TFN of a new member, the ATO should check for any unclaimed money for the individual and transfer it to the new superannuation account. This would apply where an account is opened by the individual s employer; 4. Make it easier for an individual to consolidate all their superannuation accounts, through a variety of measures, including allowing them to only deal with the one APRA regulated fund that they want their entire super consolidated into. The review also recommends that superannuation funds and clearing houses be required to transfer data and money electronically within two business days; and 5. Abolish member protection rules. For further details on these recommendations the full report can be found at: Did you know Due to recent systems enhancements, members will now be able to search for unclaimed super monies as well as lost super using the ATO SuperSeeker service. For more information:

5 Page 5 Tax system improvements Removal of unlimited amendment powers for income tax assessments The Government will remove over 100 provisions in tax law that provide the ATO with an unlimited period to make an amendment to a taxpayer s income tax assessment.... ATO will only be able to make amendments beyond the standard amendment period of 2 to 4 years if there has been fraud or evasion The removal of these unlimited amendment powers will provide greater certainty for taxpayers by ensuring that their assessment for an income year will be final at the conclusion of the standard amendment period of two to four years. The ATO will only be able to make amendments beyond the standard amendment period if there has been fraud or evasion. Review into delayed or changed ATO views on significant issues The Government has released a report which examines taxpayer concerns about perceived ATO U-turns (ie where the ATO has delayed or changed their approach on significant interpretative matters or in relation to past administrative practices). The report recommends that the Government consider whether the current legislative framework adequately provides effective transparency and certainty for taxpayers where the ATO retrospectively applies new, changed or clarified views. The report also makes the following recommendations to the ATO to reduce the adverse impacts of changed and delayed ATO advice: Refine the ATO process and criteria for deciding whether to apply new, changed or clarified ATO views retrospectively. Improve ATO engagement with the community while developing technical views. Reduce the time taken to identify compliance concerns in relation to industry practices and the time taken to finalise ATO views. With the exception of binding advice, the law currently allows the ATO to apply its views retrospectively without protection against primary tax for taxpayers. As a result, taxpayers can incur significants costs where the ATO is perceived to be changing or clarifying its existing views with retrospective effect. A copy of the report, Review into delayed or changed Australian Taxation O ffice views on significant issues, is available at Did you know Superannuation Guarantee payments for the March quarter 2010 are due on Wednesday 28 th April 2010.

6 Underinsurance report Page % of typical families do not have sufficient insurance The Lifewise / NATSEM Underinsurance Report was released in early March. NATSEM (National Centre for Social and Economic Modelling) was commissioned by Lifewise to investigate the costs of underinsurance to individuals and the community. The research, which is based on the typical middle-income family with young children, shows: 1 in 5 families will be impacted by the death of a parent or a parent being unable to work due to serious illness or injury; The typical Australian family will lose half or more of their income following a serious illness, injury or loss of a parent due to underinsurance; 95% of families do not have sufficient insurance; underinsurance is expected to cost the Government $1.3 billion over the next 10 years. The report also includes case studies which demonstrate the financial impact on a typical Australian family of having typical versus recommended levels of insurance. Lifewise is a public awareness initiative of the Australian life insurance industry. A copy of the summary research report is available on IFSA s website: ary%20research%20report_final.pdf ASIC review of term deposit market dual pricing creates a risk that retail investors could inadvertently rollover into and remain in low interest term deposits ASIC s review of the Australian term deposit market has revealed that many ADIs promote their term deposits by advertising only the highest term deposit rates available on one or two terms while maintaining lower interest rates for all other terms offerred. As term deposits can roll over automatically at maturity, this dual pricing practice creates a risk that retail investors could inadvertently roll over into and remain in low interest term deposits. ASIC has made the following recommendations for ADIs that adopt a dual pricing practice: advertising should not give investors the impression that good or competitive returns are available across all deposit terms; it should be clearly stated in all disclosure documents (including application forms, product disclosure statements (PDSs), prematurity & post-maturity letters) that dual pricing exists and that because term deposits can roll over automatically there is a significant risk of rollover from a high to a low interest rate; pre-maturity letters should clearly disclose the actual or indicative interest rate that will apply to the new term deposit on rollover; and a grace period of 5-14 business days should apply when a term deposit rolls over by default and this should be clearly communicated to investors at every disclosure point including PDSs, pre-maturity and post-maturity letters.

7 Page 7 ASIC review of term deposit market, cont. ASIC s Chairman, Mr D Aloisio, said that retail investors should ask themselves the following questions: 1. What will the interest rate be if I renew my term deposit? 2. Should I switch to a different term to get a better rate? 3. Should I switch to a different bank, credit union or building society to get a better rate? 4. Does another product, such as a high interest at-call account, offer me a better deal? The review did not include all ADIs however ASIC will work with the Australian Bankers Association and Abacus Australian Mutuals to secure broader industry support and implementation of these recommendations. ASIC will also conduct a follow up review one year after the implementation of its recommendations. A copy of the full report is available at Social security rates increase...selected social security pension rates have increased from 20 March From 20 March 2010 the maximum adult rates for certain social security pensions and allowances as well as the deeming rates have changed. Both the old and the new rates are outlined below. Pension rates Maximum base rate + Maximum transitional Recipient pensioner supplement (pf) pension rate (pf) status Old New Old New Single $ $ $ $ Partnered $ $ $ $ (each) Impacted pensions include the Age Pension, Disability Support Pension, Carer Payment, Wife Pension, Widow B Pension, veteran income support payments and Bereavement Allowance. Pension income test limits (upper thresholds/disqualifying limit) Recipient Current (pf) Transitional (pf) status Old New Old New Single $1, $1, $1, $1, Partnered (each) $2, $2, $2, $2, Partnered illness separated $2, $3, $3, $3, Did you know From January 2011, only Disability Support Pension recipients permanently residing in Australia will be able to continue to receive the DSP except under limited and specific circumstances. For more information:

8 Page 8 Social security rates increase, cont. Pension asset test limits (upper thresholds/disqualifying limit) Recipient status Single, homeowner Single, non homeowner Partnered, homeowner Partnered, non homeowner Partnered illness separated, homeowner Partnered illness separated, non homeowner Current Transitional Old New Old New $626,000 $645,500 $594,750 $601,000 $755,000 $774,500 $723,750 $730,000 $928,000 $957,500 $925,500 $936,000 $1,057,000 $1,086,500 $1,054,500 $1,065,000 $1,148,500 $1,187,500 $1,086,000 $1,098,500 $1,277,500 $1,316,500 $1,215,000 $1,227, a regular revaluation of all shares and managed investments held by pensioners will be undertaken by Centrelink on 20 March 2010 Deeming rates Deeming rate Old New Lower rate less than $42,000 for singles OR 2% 3% less than $70,000 for couples Upper rate above $42,000 for singles OR above $70,000 for couples 3% 4.5% Allowance rates Recipient status Old (pf) New (pf) Single, 21 or over, no children $ $ Single, 21 or over, with children $ $ Single, 60 or over, after 9 continuous months on payment (incl PhA) $ $ Partnered (each) $ $ Impacted allowances include Newstart Allowance, Widow Allowance, Partner Allowance and Sickness Allowance. Allowance income test cut-offs Recipient status Old New Single, 21 or over, no children $ $ Single, 21 or over, with children $ $ Single, 60 or over, after 9 continuous months on payment (PhA) $ $ Partnered (each) $ $ Rate changes have also been made to other payments such as the adult pension supplement, parenting payments, rent assistance, pension bonus scheme and certain other supplements/allowances. Finally, a regular revaluation of all shares and managed investments held by pensioners will be undertaken by Centrelink on 20 March This occurs automatically every six months however, pensioners can request an individual revaluation at any time. Full details of all changes can be found via the following link: _table_ htm

9 Page 9 Changes to super borrowing arrangements... only licensed financial service providers will be able to offer instalment warrants to superannuation funds Superannuation borrowing arrangements considered a financial product The Government has announced that it proposes to amend the Corporations Regulations 2001 to cover certain superannuation borrowing arrangements (ie instalment warrants). Under the proposed changes, borrowing arrangements permitted under superannuation law will be considered a financial product, under the Corporations Act Only licensed financial service providers will be able to offer these borrowing arrangements to superannuation funds. This will come into effect three months after the regulations are made. Amended tax treatment for instalment warrants The Government has also proposed amendments to the tax law regarding traditional instalment warrants and non-traditional instalment warrants (limited recourse superannuation borrowing arrangements). The changes align the tax law with current accepted practice by implementing a look-through approach to effectively ignore the instalment warrant trust and treat the owner of the instalment warrant (ie the investor or superannuation trustee) as the owner of the underlying asset for income tax purposes. The proposed changes seek to ensure that there are no CGT consequences when the last instalment is paid or when the instalment warrant trustee transfers the underlying asset to the investor or superannuation trustee. The owner of the instalment warrant will also be assessed on any income and will be entitled to any deductions for the underlying asset. These changes are proposed to apply to income tax assessments for 2007/08 and later income years. For more information, a consultation paper outlining the proposed changes to the tax treatment of instalment warrants is available at Submissions close on 9 April Tax agent visits for SMSFs... field visits being conducted for SMSF tax agents The ATO will be increasing its focus on tax agents and will be conducting field visits to review self managed super funds (SMSFs) annual income tax returns, via a pilot program launch in Visits will ascertain the degree of non-compliance of SMSF clients linked to particular tax agents, including the accuracy, completeness and compliance with their lodgement obligations. In addition, through tax agent visits, the ATO will provide education and encourage tax agents to voluntarily disclose errors in reports and the claims that they lodge. If there are ongoing compliance issues, the matter may result in closer scrutiny of: the tax agent's client base, and specific SMSFs. More information can be found at: htm

10 Page 10 ATO warns against circumventing excess contributions tax The ATO has issued Taxpayer Alert TA 2010/2 - Circumvention of Excess Contributions Tax to warn self managed superannuation funds (SMSFs) against using certain arrangements which attempt to circumvent excess contributions tax.... a trustee who administers an SMSF in accordance with such clauses may breach provisions under tax and superannuation law The arrangements being warned against involve either: inserting clauses into an SMSF s trust deed; or creating a new SMSF with such clauses included in its deed. The clauses require any excess contributions to be held in a separate trust to the SMSF and then be returned to the member together with any earnings. The ATO are concerned that a trustee who administers an SMSF in accordance with such clauses may breach provisions under tax and superannuation law. The ATO are specifically concerned that: the clauses are not effective in creating separate trusts; the excess contributions and income arising from their investment is not correctly assessed to either the trustee or the member; inserting the clauses has the effect of avoiding excess contributions tax and entities involved in such arrangements may be a promoter of a tax exploitation scheme under tax law; the return of excess contributions breaches the contributions, preservation and cashing standards under superannuation law; and the excess contributions are intermingled with the SMSF s other assets (ie not actually held in a separate trust) and this may result in breaching the sole purpose test under superannuation law Anyone involved in or considering these arrangements should obtain professional tax advice or contact the ATO to seek guidance in relation to the tax and superannuation regulatory issues described above. For a copy of the taxpayer alert, search for TA 2010/2 at Did you know For the 2008/09 and 2009/2010 financial years, the minimum pension payment required to be taken from an account based or term allocated pension was halved. Unless further relief is granted, the standard minimum payments will apply from 1 July 2010.

11 Page 11 Legislative update the loss relief measure removes significant income tax impediments to mergers between complying superannuation funds - Chris Bowen MP CGT loss relief for merging superannuation funds given Royal Assent Commencing 24 March 2010 (date of Royal Assent), complying superannuation funds and approved deposit funds with five or more members that merge will be allowed to rollover their capital losses and transfer revenue losses. This is a temporary measure only and applies to CGT events between 24 December 2008 and 30 June Legislation stalled in the Senate: Fairer private health insurance incentives bills which amend various acts to give effect to the budget measure to introduce three new private health insurance incentive tiers. The bills include the Fairer Private Health Insurance Incentives Bill 2009, the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2009 [No. 2] and the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2009 [No. 2]). Tax Laws Amendment (2010 Measures No. 1) Bill 2010 relating to: approved superannuation clearing houses; forestry managed investment schemes; managed investment trusts; eligibility criteria for the entrepreneurs tax offset; and the corporate consolidation regime; and amends 13 Acts to make miscellaneous and technical amendments. FOR GENERAL INFORMATION ONLY This information has been prepared by BT Funds Management Ltd ABN It is provided solely for the general information of external financial advisers and must not be relied on as a substitute for legal, tax or other professional advice. Further, it must not be copied, used, reproduced or otherwise distributed or circulated to any retail client or other party. The information is given in good faith and has been derived from sources believed to be accurate at its issue date. However, it should not be considered a comprehensive statement on any matter nor relied upon as such. BT Funds Management Ltd (including its related entities, employees and directors) does not give any warranty of reliability or accuracy or accept any responsibility arising in any way including by reason of negligence for errors or omissions in the information.