The Federal Government has confirmed — with some minor modifications — the changes to superannuation announced on budget night. The modifications were mainly to transitional arrangements. With the policy now set, practitioners can turn their mind to the likely implications. The confirmation comes after public consultation on the proposals.
The policy for simplifying Australia's superannuation system, as first announced in the May 2006 Federal Budget, was confirmed this month. Further changes are possible as the legislation is yet to be drafted.
Here is a summary of the more important and interesting policy changes that were confirmed or updated as part of the consultation process.
At the conclusion of this article, we consider the need to keep deeds up to date.
Putting money into super
Contribution Rules: The rules concerning contributions to super are as originally detailed in the Plan, however some additional transitional relief for those approaching retirement has been included.
- Deductible limits: Deductible contributions will be limited to $50,000 a year, and will be taxed at 15%. Anyone aged 50 years or over will have 5 years to make deductible contributions of up to $100,000 a year.
- Employer contributions: Employers will receive a full deduction for all contributions made (up to the limits) for employees up to age 75 (though superannuation guarantee will only apply to employees up to age 70).
- Self-employed: Deductible contributions in respect of the self-employed will be treated the same way as deductible contributions made by employers.
- Undeducted contributions: Post-tax contributions will be limited to $150,000 a year, with a couple of notable exceptions:
- a person can bring forward two years of contributions and contribute $450,000 in one year (and not make any further contributions for the following two years); and
- from 10 May 2006 to 30 June 2007 all individuals eligible to contribute to superannuation will be able to make a maximum of $1,000,000 post-tax contribution in respect of the relevant year.
Taking money out of super
- Compulsory cashing: The requirement to compulsorily cash superannuation benefits will be abolished.
- RBLs: RBLs will be abolished from 1 July 2007.
- Paying benefits: Superannuation benefits paid to persons aged 60 or older on or after 1 July 2007 from a taxed source will be tax free (this applies to most people other than for retirement benefits paid from government schemes to public servants). This means:
- Lump sum benefits to these people will be tax free; and
- Pension benefits, even those which commenced before 1 July 2007, will be tax free.
Paying benefits: Superannuation benefits paid to persons aged less than 60 on or after 1 July 2007 from a taxed source will be taxed as follows:
- Lump sum benefits will have two components: an exempt component and a taxed component. The exempt component (which includes amounts such as pre-1983 contributions and undeducted contributions) will be tax free. The taxed component will be tax free up to a low rate threshold (initially $140,000) then taxed at 15% above that threshold — except where the recipient is aged less than 55, in which case this component is taxed at 20%.
- Pension benefits will be taxed in a similar manner to the way pensions are currently taxed. However, overall tax will be less in some circumstances. Once the recipient turns 60, the pension will be tax free.
- Proportional drawdown: In both cases, payments will be deemed to include both exempt and taxable components, paid in proportion to the amount these components constitute of the recipient's total benefit. So there's no more picking and choosing whether a payment is of an exempt component or a taxed component.
- Paying death benefits: The payment of death benefits from a super fund will continue to be concessionally taxed. In summary:
- Lump sum benefits to a dependant (as defined in the ITAA36 ) will be tax free. Lump sum benefits paid to a non-dependant for ITAAA36 purposes, but who meets the SIS definition of dependant , will have the taxable component taxed at 15%.
- Reversionary pensions will be taxed according to the age of the primary and reversionary beneficiaries. If the primary beneficiary was aged 60 or over at the time of death, then the payments to the reversionary will be tax free. If the primary beneficiary was aged less than 60, then the payments will be taxed at the reversionary beneficiary's marginal tax rate until the reversionary turns 60 (after then it will be tax-free).
- New pensions — following the primary beneficiary's death — can be paid to an ITAA36 dependant, and these will be taxed as a reversionary pension — except that a new pension paid to a dependent child will have to be cashed to a lump sum when the child turns 25 (unless they're permanently disabled).
- New pensions can't be paid to a non-ITAA36 dependant — instead, they must be paid as a lump sum (remembering that they must still be a SIS dependant).
- Pension rules: There will be one set of pension rules which govern the payment of all pensions that commence on or after 1 July 2007. The new rules require:
- Minimum annual amount: a minimum amount of the capital funding the pension must be paid to the pensioner each year. The minimum, which is expressed as a percentage of the capital, is determined by reference to the pensioner's age.
- No maximum: there will be no maximum amount that can be paid in a year, reflecting the fact that pensions and lump sums will be taxed in the same way.
- But a maximum applies for transition to retirement pensions: pensioners being paid a transition to retirement pension will only be able to be paid a maximum of 10% of the capital a year.
- Transfer on death: the pension may only be transferred on death to a dependent or cashed as a lump sum to the pensioner's estate.
Existing pensions: For pensions which are in existence:
- These will be deemed to meet the new rules if they commenced before 1 July 2007 and they meet their existing rules.
- The Government has stated that existing complying pensions (such as life pensions) will not be able to be terminated pursuant to the new legislation — terminating a current complying pension will only be permitted in accordance with the current rules.
- Existing allocated pensions may be transferred to the new pension product without having to commute their existing pension.
Social Security Eligibility Changes
- There have been some changes to the eligibility criteria (that is, the means testing of individuals) for the age-pension.
- In September 2004 the market-linked (or 'term allocated') pension was introduced, and gave pensioners a 50% asset-test exemption from the assets used to fund the pension. This 50% exemption was also applied to all complying pensions commencing on or after that date (other complying pensions had previously enjoyed a 100% assets test exemption).
- To coincide with the third anniversary of those rules being introduced, from 20 September 2007:
- Lower pension assets test: pension payments will be reduced by $1.50 per fortnight (down from $3.00 per fortnight) for every $1000 of assets held by the pensioner; and
- No 50% exemption: the 50% assets test exemption for complying income streams which commence on or after 20 September 2007 will be abolished.
Implications for clients - Get thinking...
- The Government's retirement policy has now been finalised and we will now await the form of legislation, and any further changes that may be announced in the course of that drafting exercise. However, there's enough certainty in the content of the final policy to allow advisers to start thinking about potential implications for their clients.
Will SMSF deeds need to be updated?
The exact form of any appropriate changes to SMSF deeds can only really be assessed when the legislation is released.
Based on the content of the policy changes, our view is that it is unlikely to be strictly necessary to update SMSF deeds merely as a result of these changes becoming law:
- However, that is only on the basis that the deed was fully up to date just before the budget this year; and
- Even so, practitioners should continue with the usual practice of keeping their clients' SMSF deeds up to date.
Why consider updating?
Updating regularly ensures that when the law changes the SMSF has a deed that reflects current law and that it will not cause confusion by reflecting outdated legislation. In this case, confusion may arise from soon to be outdated concepts such as:
- compulsory cashing of benefits: the deed may contain requirements that are unnecessary such as the responsibility of the members to notify the trustee when the member retires after attaining age 65; or:
- pension payment provisions: some SMSFs will contain full provisions setting out the pension payment conditions for various types of pension which will have become obsolete.
In addition, funds that are in the practice of issuing Product Disclosure Statements to new members will need to ensure that future PDSs reflect the legislative changes.
For more information, contact Julian Smith at Maddocks on 03 9288 0555.