Tax Brief. 11 May Budget Measures - Superannuation. New Personal Income Tax Rates

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1 Tax Brief 11 May Budget Measures - Superannuation The Treasurer s Budget will no doubt be remembered for its generosity to families, not to mention the size and speed of the cash handouts it offered. Business tax measures were few; indeed, tax measures of any kind were scarce. Significant measures that made it into the Budget Papers mostly dealt with superannuation matters. Our special Budget Edition Tax Brief will concentrate on these. New Personal Income Tax Rates One of the headline items in the Budget is the significant reduction in personal marginal tax rates. These changes will be phased-in in two stages one commencing on 1 July 2004 and the second on 1 July From 1 July 2004, the threshold for the 42% rate will be increased from $52,001 to $58,001, and the threshold for the 47% rate will be increased from $62,501 to $70,001. From 1 July 2005, the threshold for the 42% rate will be further increased to $63,001 and the threshold for the 47% rate to $80,001. The new rate schedule for residents individuals will be: Income Range ($) Tax Rate (%) Current , , , ,001 21,600 6,001 21,600 6,001 21, ,601 52,000 21,601 58,000 21,601 63, ,001 62,500 58,001 70,000 63,001 80, ,501 and above 70,001 and above 80,001 and above

2 Two obvious matters to look for in the coming weeks: whether the Opposition will agree to these reductions and to fast-track the legislation needed to enact the first tranche; and then whether the Government follows the Paul Keating example by trying to enact a set of rate reductions that will only take effect well after the next election. Superannuation Integrity Measures The Government proposes to amend the Superannuation Industry Supervision Regulations so that: accumulation funds will be required to allocate all contributions, and fully vest benefits in a given member; and defined benefit funds and funds providing defined benefit pensions will be required to have at least 50 members. These measures are aimed at schemes involving the forfeiture of superannuation benefits, contributions to reserve accounts and the use of defined benefit funds and defined benefit pensions. It is worth noting that the Government has sought to moderate this behaviour by amending the regulations rather than by applying the general anti-avoidance provisions to these practices. For accumulation funds, we would expect the new rules to require the allocation of all contributions to designated member accounts for the person on whose behalf the contribution was made. It is likely that the regulations will go on to prohibit divestiture of vested benefits and require earnings to be allocated on a basis proportionate to a member s vested benefit. For defined benefit funds and funds paying defined benefit pensions, the requirement of at least 50 members will pose obvious difficulties. Since defined benefit pensions are defined very broadly in the regulations the term currently captures all complying pensions this measure will restrict the ability of small funds to provide complying pensions and asset-test exempt pensions. Small funds will simply lack sufficient members. This measure is clearly designed to encourage small funds wanting to offer complying pensions to use the marketlinked (growth) pensions announced by the Government in its February Discussion Paper, Australia s Demographic Challenge. These growth pensions are expected to become complying pensions from 20 September (This new type of pension is discussed more fully in our Tax Brief of 2 March 2004, New Superannuation Measures, available on our website.) The measures are intended to take effect from 11 May They are not intended to have an impact on existing defined benefit funds, nor existing funds paying a defined benefit pension. Small funds will still be able to provide defined benefits pensions where these are funded via a life insurance company annuity Budget Measures - Superannuation

3 Allocated pensions are not expected to be affected by these measures. Superannuation Surcharge Reduction The Government announced that it will further reduce the maximum rate of superannuation surcharge. While no explicit mention was made of the termination payments surcharge, we would expect the same rate reductions to apply. The proposal is to reduce the superannuation surcharge rate to 12.5% for , 10% for and 7.5% for and subsequent years. It remains to be seen whether this announcement provokes the same political machinations that delayed the amendments which only recently reduced surcharge rates to 14.5% (for this year), 13.5% ( ) and 12.5% ( ). The new rate schedule will be: Current Rates (%) Proposed Rates (%) & onwards Government Co-Contribution Scheme One unexpected tax measure in the Budget is the Government s announcement to increase entitlements under the superannuation co-contribution scheme. Three changes are proposed: First, the Budget proposes increasing the maximum co-contribution by giving $1.50 for every $1 of personal contribution made by a low income taxpayer up to the (increased) co-contribution maximum. This means the maximum Government contribution will be increased under the new arrangements from $1,000 to $1,500 in respect of a $1,000 personal contribution. Secondly, the income threshold at which contributions are withdrawn will be increased from $27,500 to $28,000, so that slightly more low-income taxpayers will qualify for a full co-contribution under the scheme. Thirdly, the rate at which the Government s co-contribution is withdrawn will be reduced. Co-contributions will be reduced at the rate of 5 cents for each Budget Measures - Superannuation

4 extra dollar of income earned above $28,000. At this rate of withdrawal, the co-contribution phases out completely at an income level of $58,000. (The cocontribution is currently withdrawn at the rate of 8 cents per dollar and so phases out completely for income above $40,000.) These changes will apply for personal contributions made from 1 July CGT Roll-Over Relief for Merging Superannuation Funds The Government has also started to address some of the tax consequences of its recently enacted Superannuation Safety arrangements which commence on 1 July As a result of these measures, it is likely that some employer-sponsored superannuation funds will have to merge with other funds because of the added regulatory strictures and compliance obligations. The Government proposes to provide new capital gains tax (CGT) rollover relief on the transfer of assets to the new fund. Re-Announced Measures Finally, this Budget continues recent practice by repeating much that has already been announced. So the Budget Papers re-announce the measures released on 25 February 2004 in the Government s Discussion Paper, Australia s Demographic Challenge, such as: allowing people to access their superannuation in the transition to retirement; removing the work test for superannuation contributions for people under the age of 65; requiring compulsory payment of superannuation benefits for people over 75; preserving rolled-over employer eligible termination payments; and removing the requirement for actuarial certificates in some instances. More details about these measures are contained in our Tax Brief of 2 March 2004, New Superannuation Measures (available on our website) Budget Measures - Superannuation

5 For further information, please contact Sydney Shayne Carter phone G&F document ID _15.docx These notes are in summary form designed to alert clients to tax developments of general interest. They are not comprehensive, they are not offered as advice and should not be used to formulate business or other fiscal decisions. Liability limited by a scheme approved under Professional Standards Legislation Greenwoods & Freehills Pty Limited (ABN ) Sydney ANZ Tower, 161 Castlereagh Street, Sydney NSW 2000 Australia Ph , Fax Melbourne 101 Collins Street, Melbourne VIC 3000, Australia Ph Fax Perth QV.1 Building, 250 St Georges Terrace, Perth WA 6000, Australia Ph Fax Budget Measures - Superannuation