S U P E R A N N U A T I O N P T Y L T D S P E C I A L I S T S I N S E L F M A N A G E D S U P E R A N N U A T I O N ABN 30 007 778 341 T E C H N I C A L U P D A T E B U D GET S PECIAL I N T H I S I SSUE T AX AT I ON O F B E N E F I TS AB OLISHING R B L s 2 0 0 6-2 0 0 7 F E D E R A L B U D G E T S P E C I A L A P l a n t o S i m p l i f y a n d S t r e a m l i n e S u p e r a n n u a t i o n The Government has a knack of pulling superannuation rabbits out of their budget hat and the 2006-07 Budget was no different. 9 May 2006 may well be remembered as a landmark day in superannuation history when the Government announced their plan to simplify and streamline the existing superannuation system in a way that will without doubt see the biggest and certainly most significant changes to superannuation law since its introduction in Australia. B E N E F I T S PAI D OVER 60 GRE AT E R F L E X I B I LITY B E N E F I T S PAI D - U N D E R 6 0 D E AT H B E N E F I T S C ONTRIBUTION R U L E S AG E P E N S I ON C H AN GES U N T AX E D SUPER F U N DS L OST S U P E RAN N U AT I ON AD D I T I ON B U D GET C H AN GES The plan, available online at http://simplersuper.treasury.gov.au, takes a comprehensive look at the existing myriad of rules surrounding contributing to and withdrawing from superannuation funds and proposes significant changes that will impact on the retirement benefits of all Australians including those already in receipt of an income stream. The Government encourages everyone to comment on this plan and all submissions must be made by 9 August 2006. Cavendish has taken the time to review these changes and have provided a summary below. The proposed commencement date for these changes is 1 July 2007 unless indicated otherwise. This summary is relevant to all superannuation however particular sections have been written in consideration of Self Managed and Small APRA Superannuation Funds. S U M M AR Y
TAXATION OF END BENEFITS The current rules relating to the payment of benefits as either lump sums or pensions is highly complex with consideration needing to be given to such issues at the ETP components included, previous benefits drawn, tax applicable to each component, whether the benefit exceeds the Reasonable Benefit Limit (RBL), allowable deductions as well as numerous other matters. In addition to this are the reporting requirements associated with RBL s, issuing PAYG Payment Summaries, Quarterly Instalment Activity Statements, Annual PAYG reconciliation. It is a daunting concept for anyone approaching retirement and in some instances would make people run the other way. From 1 July 2007 the Government proposes the following changes to the taxation of end benefits; Abolishing RBL s Lump sums and pensions paid to people over the age of 60 will be tax free Greater flexibility for drawing retirement benefits Simplification of taxation for lump sums and pensions paid to people under 60 Modified death benefit rules ABOLISHING RBL s The heading says it all. An individual will not receive a tax concession based on how much they have in superannuation but rather on how old they are when they receive their benefits. BENEFITS PAID TAX FREE FOR 60 AND OVER All lump sum benefits from a taxed superannuation fund to an individual aged 60 or over will be tax free. No ETP documentation will be required and the information will not need to be reported in an individual s personal tax return. Existing preservation rules will not change, meaning an individual will still need to satisfy a condition of release prior to accessing their benefits in the form of a lump sum.
The same tax free status will apply for pensions paid from a taxed superannuation fund including all pensions commenced prior to 1 July 2007. This will have significant tax ramifications for individuals currently paying non-rebatable pensions. Existing transition to retirement laws will be retained, allowing people to access their benefits in the form of a non-commutable income stream while still working. This will have the added incentive of individuals not having to report the income being paid from the superannuation fund and potentially reducing personal tax liabilities further. Different rules will apply to lump sums and pensions paid from an untaxed source such as a Government Fund or an Employer in the case of lump sum. This will be expanded on later. GREATER FLEXIBILITY Minimum Pension Standards Currently superannuation law allows for 5 types of pensions to be paid from a Superannuation Fund - lifetime, fixed term, life expectancy, market linked and allocated pensions. Acknowledging that there are restrictions as to whether a fund can pay any of the above pensions, there are minimum standards that each must meet in order to be considered an income stream and therefore eligible for certain tax concessions within the fund. New minimum standards will be introduced for all pensions that commence from 1 July 2007; Requiring the member withdraw a prescribed minimum amount each year, That there be no provision for an amount to be left over when the pension ceases, and That the pension could be transferred only on death to a dependant or cashed as a lump sum to the estate. A fund meeting these standards will be eligible for the tax concession on the assets supporting the pension. Pensions meeting the existing rules prior to 1 July 2007 will be deemed to meet these standards. There will be no maximum income requirement and an individual may draw as much as their account balance will allow with the exception of transition to retirement pensions where it is proposed that the maximum amount withdrawn can not exceed 10% of the member balance, at the commencement of the year, in any one year.
The proposed minimum annual pension payment requirements are: Age Minimum Payment - % of account balance 55-64 4% 65-74 5% 75-84 6% 85-94 10% 95+ 14% Removal of Compulsory Cashing requirement A member aged 65 or over will be able to maintain their benefits in accumulation without satisfying an annual work test. It will be an individuals own decision whether they take their benefit in the form of a pension or a lump sum. Likewise there will be no compulsory cashing of benefits at age 75. However, for the fund to be eligible for tax exemption on the income it earns it must be paying a pension that meets the minimum standards. Therefore if an individual chooses to pay part of their benefit in the form of a pension and maintain the balance in an accumulation account the exemption will only apply to the income generated on the assets supporting the pension. BENEFITS PAID SIMPLIFICATION FOR THOSE UNDER 60 Those members of a fund that have satisfied a condition of release prior to age 60 and choose to pay their benefit in the form of a lump sum or pension will also experience a change to the current system that will simplify the calculation of tax and, based on their ETP components, potentially increase their entitlement to an annual tax deduction for their pension. There are currently eight (8) ETP components that have varying tax implications for an individual and may or may not be included in the calculation of a deduction amount. This will change to two (2) components, namely a taxable component and an exempt component. The exempt component will be tax free and consist of the pre-july 1983 component, CGT exempt component, post-june 1994 invalidity component, concessional component and the undeducted contributions. The taxable component will be the post June 1983 component and any non-qualifying component. There will be no excessive component because of the abolition of the RBL.
The pre-july 1983 component will be calculated at a particular date based on the current legislative formula and will become a fixed amount. The taxation treatment of lump sum payments paid prior to age 60 will be similar to the current taxation system however tax will only be applicable to the taxable component and the existing low rate threshold will continue to apply for payments made to people over the age of 55. Based on the current thresholds the first $129,751 would be taxed at 0% and the balance would be taxed at 15%. For those under 55 years of age the full taxable component will be taxed at 20%. For a fund paying a pension, there is no fundamental change in the way the pension will be taxed however the member may be entitled to a higher deductible amount as the undeducted purchase price will be the full exempt component. This will benefit members with a pre-july 1983 component and a concessional component. The 15% superannuation pension rebate would apply to all pensions paid to individuals aged between 55-59 years. On turning 60 all of the above becomes irrelevant. DEATH BENEFITS The most significant changes to death benefits will be that payments made to a dependant will be 100% tax free as there will be no excessive pension RBL. If the deceased member was in receipt of a pension and was over the age of 60 when they passed away then irrespective of the age of the reversionary, the pension will be exempt from tax. If the pensioner was under 60 years of age the pension would continue to be taxed at marginal rate of the reversionary less deductions and rebate unless the reversionary is over 60, in which case the pension would be tax free. Payments of lump sum to non-dependants will be treated in the same manner as lump sums to members aged between 55-59 years however there will be no entitlement to the low rate threshold, therefore 15% would be applied to the full payment. SIMPLIFIED CONTRIBUTION RULES Our current laws provide for different rules for contributions based on whether those contributions are made by an employer an employee or a self employed person. Until now the rules have disadvantaged the self employed by restricting the amount they can claim as a personal deduction and excluding them from such initiatives as Government co-contributions. Likewise, contributions made by an employer that
exceeded the maximum contribution limit attracted 15% tax inside the superannuation fund however the employer was not entitled to a tax deduction on the amount exceeding the limit. From 1 July 2007 the age based deduction limit will be abolished and replaced with a single deduction limit of $50,000 applicable to all ages. Employers and the self employed will be entitled to a full deduction on any contributions made on behalf of employees or themselves respectively. However any deductible contribution above $50,000 will be taxed at top marginal tax rate. The Australian Taxation Office will monitor this via the income tax and regulatory return as well as via the reporting process for cocontributions. A transitional period is proposed for all people aged 50 and over, allowing them a maximum deductible contribution of $100,000 until 30 June 2012 from which time it will revert to $50,000. Employer and self employed deductible contributions will also extend beyond age 69 allowing a full deduction for contributions made for any member under the age of 75. Another significant change will impact on the level of undeducted contributions allowed in any one year. Based on the new tax incentives of not paying tax on withdrawals post age 60, the Government are proposing to cap the level of undeducted contributions made in one year to $150,000. They are considering allowing this to be averaged over a three year period to allow one off large contributions. They re concerned that the level of tax concessions now available will entice high wealth individuals to transfer large levels of assets from outside into the Fund to avoid tax. It is important to note that if the proposals in the plan are adopted that this cap on undeducted contributions will apply from 9 May 2006. Undeducted Contributions in excess of this cap will be refunded to the individual. The Government co-contribution scheme will also be extended to self employed persons allowing them to have their non deducted contributions matched as if they were an employee. To qualify they must earn 10% or more of their income from carrying on a business, eligible employment or a combination of both. They also must be earning under the co-contribution upper threshold and be under 71 years of age. Income will be determined by adding the assessable income of the individual and then reducing that amount by their expenses incurred in carrying on the business. From 1 July 2007 the lower and upper thresholds for all co-contributions will be indexed in line with Average Weekly Ordinary Time Earnings (AWOTE).
AGE PENSION ARRANGEMENTS ACCESSING CENTRELINK Currently a person s age pension benefit is reduced by $3 for every $1,000 of assets above the relevant threshold, therefore a single home owner receives a full pension if their assets are below $157,000 and the pension cuts out once their asset value surpasses $325,500. Under the proposed changes, the age pension benefit would be reduced by $1.50 for every $1,000 of assets above the relevant threshold. Under the numbers provided above, a single home owner would be able to have up to $494,000 in assets before they lose their pension entitlement. To counter this change, from 20 September 2007 the current 50% asset test exemption that applies to complying pensions would be removed again in a bid to stop high wealth individuals accessing the age pension. All complying pensions commenced between 20 September 2004 and 20 September 2007 will still be 50% exempt from the assets test as will complying pensions prior to 20 September 2004 still receive 100% exemption. OTHER MEASURES OF INTEREST While the above proposed changes are the most significant to Self Managed Superannuation Funds, there are a number of other changes proposed will impact on the retirement planning process from 1 July 2007. Employer ETPs With the removal of RBL s and the proposal to simplify the various ETP components into two categories this has further reaching effects on those people who receive payments such as Golden Handshake from their employer over and above tax free Bona Fide Redundancy payments and invalidity-related payments. Up front the Government have indicated that there will be no changes to the Bona Fide Redundancy laws. An employer ETP currently can consist of the following components, post-june 1983 untaxed element, pre-july-1983 component, post-june 1994 invalidity payment and an excessive component. Similarly to the changes proposed for ETPs from a superannuation fund the government has announced that these components will be simplified to two components, an exempt component comprising of the pre-july 1983 component and the post-june 1994 invalidity component and a taxable component which would be the
post-june 1983 component. Again there would be no need for an excessive component as there are no RBL s. The following tax rate would apply to the taxable component of an employer ETP: Age Lump Sum Payment Amount Tax Rate Under 55 55 and Over Up to $140,000 30% Over $140,000 Top Marginal Tax Rate Up to $140,000 15% Over $140,000 Top Marginal Tax Rate Employer ETPs will no longer be able to be rolled over into a superannuation fund. UNTAXED SUPERANNUATION FUNDS While only applicable to approximately 10% of superannuation fund members, it is worthwhile to note the changes proposed to the taxing of benefits from an untaxed superannuation fund. These have been summarized as follows; Lump Sum Payments Age Lump Sum Payment Amount Tax Rate Age 60 or over Up to $700,000 15% Over $700,000 Top Marginal Tax Rate Age 55-59 Up to Low Rate Threshold (currently $129,751) 15% Low Rate Threshold $700,000 30% Over $700,000 Top Marginal Tax Rate Under Age 55 Up to $700,00 30% Over $700,000 Top Marginal Tax Rate
Pension payments Currently pensions paid from an untaxed source are not eligible for a superannuation pension rebate, under the proposed changes the pension will be taxed at marginal tax rate but entitled to a 10% rebate if the recipient is 60 years of age or older. For pension recipients under the age of 60 there will be no pension offset. Rolling over benefits to a taxed superannuation fund Under the proposal, untaxed benefits rolled over to a taxed superannuation fund will be taxed at the top marginal rate by the transferring fund for any amount over $700,000. This amount will then be considered an exempt component in the receiving fund. The rollover value up to $700,000 will be taxed under the current arrangement and 15% will be withheld by the receiving fund. LOCATING AND TRANSFERRING LOST SUPERANNUATION In simplifying the superannuation system the government is making changes to the current lost member system administered by the ATO. The ATO will track down and notify members of lost benefits and provide them with a form to have the benefits transferred to the superannuation fund of their choice. The ATO will then process that transfer within 30 days of receiving the request. This is reduced from the current time frame of 90 days. It is expected that the ATO will be more proactive in their administration of the lost member register. ADDITIONAL BUDGET CHANGES In addition to the plan introduced by the Government to simplify and streamline the superannuation system there were a number of other announcements made on budget night that will have an impact on the retirement income benefits of some Australians. The focus of this bulletin is to highlight the proposed changes to the superannuation system and as such we will not go into these points in detail; Increase in the CGT rollover relief net asset threshold from $5million to $6million Replacing the current 50% controlling interest test with a 20% significant interest test for individual Personal Tax cuts reducing Marginal Tax liabilities for existing pensioners Increases in the Low Income Tax Offset and the Senior Australian Tax Offset
SUMMARY The announcements discussed above will affect each and every one of us in the superannuation industry in one way or another. While some of the proposals will bring high praise and relief to many existing superannuation members, other issues will no doubt raise concerns and create debate about their validity and the effect they will have on peoples retirement income planning. Overall the changes appear to be a move in the right direction to simplify the superannuation system and make the decision-making process a far easier task for those moving into retirement, with less red tape and a more flexible approach to the drawing of benefits from a superannuation fund. Cavendish will continue to monitor the proposed changes and will keep you informed as things become more clearly defined. If you have any questions relating to the announced plan please forward these to technical@cavendishsuper.com.au or telephone our office directly. For further information please contact Cavendish Superannuation Pty Ltd PHONE 1800 808 354 FACSIMILE (08) 8212 6747 WEB www.cavendishsuper.com.au MAIL GPO Box 9981 Adelaide SA 5001 This article was written by Tim Miller, Technical Services Manager, Cavendish Superannuation Pty Ltd. Copyright 2006 Cavendish Superannuation Pty Ltd. Disclaimer: The material contained in this publication is in the nature of general comment and information only and neither purports nor is intended to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by this publications without taking appropriate professional advice.