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A SUPER BUDGET – WHAT YOU NEED TO KNOW FOLLOWING THE BUDGET
John Sudano and Adrian Verdnik
Superannuation taxation rules are currently complex and make retirement planning an anxious time for self-funded retirees.
Currently pensioners take their benefits as a lump sum or by way of one or more pensions, or a mix of these options. There are five different types of pensions to choose from. Each mix of benefits has different estate planning and taxation consequences.
Superannuation is taxed on the way into the fund, earnings are taxed inside the fund, and benefits are taxed on the way out.
In its recent budget, the Federal Government proposed major reforms to the current superannuation laws, particularly relating to taxation on superannuation. The changes aim to simplify the current superannuation system. The proposed measures are summarised below.
Taxation of superannuation benefits
There will be no tax payable on benefits paid to members who are 60 years or over.
Lump sums and pensions paid to members who are under 60 years will be taxable.
RBLs will be abolished.
When do benefits need to be taken?
Compulsory cashing events will be abolished. Therefore, members have more freedom on choosing when to take their benefits as they will not be forced to take them.
New streamlined contribution rules
Age-based limits will be abolished.
Employers and self employed people will be able to claim a full tax deduction on all superannuation contributions.
The first $50,000 of tax deductible contributions will be taxed at 15% and the balance will be taxed at 45% (ie, the top marginal tax rate). There seems to be some confusion on this point. $50,000 is not the limit on deductible contributions; it’s the limit on the concessional tax treatment of contributions per member in the fund.
For example, if you are taxed at the top tax rate and are sitting on four different boards of directors, it would be possible for each board to make a $100,000 deductible superannuation contribution for you. That means that $400,000 (less the 45% tax on the contributions over the $50,000 concessional limit) could be made into a fund for you, without it counting towards your $150,000 per annum undeducted contributions cap (discussed below).
There are transitional rules for members who are 50 years or older. The first $100,000 of tax deductible contributions will be taxed concessionally up to and including the 2012 income year before the contributions tax is raised to 45% (ie, top tax rate). What’s not clear is whether someone who turns 50 in the transition period - someone who happens to be 46 now – can access the concession. We will certainly be making submissions to the Government that this should be the case.
A cap on the amount of undeducted contributions (excluding small business CGT retirement exemption roll overs) will be set at $150,000 per annum.This will be effective from 9 May 2006.
More recently, the Federal Treasurer indicated that the $150,000 undeducted contributions cap only applies to contributions made from 9 May 2006. Therefore, even if a member made a $1 million undeducted contribution on 8 May 2006, they would still be able to make a further $150,000 undeducted contribution by the end of the 2006 income year (or $450,000 if they want to take advantage of the three- year averaging).
The Government will be introducing a three-year averaging rule that will allow larger one-off contributions. This means, from 9 May 2006, trustees of superannuation funds cannot accept more than $150,000 in undeducted contributions per annum or $450,000 with no further undeducted contributions being made to the fund in respect of that member for the following two income years. The operation of the three-year averaging rule is explained in the Federal Treasurer’s Press Release No. 57 of 13 June 2006.
Tax deductibility on superannuation contributions for members will be extended from 70 years of age to 75 years of age.
Self-employed people will be able to claim the Government co-contribution, subject to similar conditions as presently exist.
Changes to superannuation pension benefits & assets testing for the age pension
The 5 different types of pensions that members currently have to choose from will be replaced with one set of minimum pension standards.
Assets test exemption for the age pension will be abolished from 20 September 2007. Instead, from that date, the assets test taper will be halved from $3 to $1.50 per fortnight for every $1,000 of assets over $157,000. The abolition of the assets test taper would not apply to pensions commenced before 20 September 2007.
Changes to the tax treatment of golden handshakes
The tax treatment of employer ETPs will dramatically change. From 1 July 2007, the pre-July 1983 component and post-June 1994 invalidity component will be exempt from tax. The post-June 1983 component will be taxed at 15% up to $140,000 for recipients aged 55 years and over, and at 30% for those aged under 55 years. Amounts beyond $140,000 will be subject to the top marginal tax rate.Further, employer ETPs will no longer be able to be rolled over into superannuation funds. 2006/7 may well become the Year of the Retiring CEO.
Death benefits
All lump sum death benefits paid to a dependant will be tax-free. Dependant in this case is a ‘tax’ dependant which is narrower that a ‘superannuation dependant. The main difference is that a financially independent adult child is a superannuation dependant so they can receive a death benefit, but they are not a tax dependant, so they get slugged with a 15% tax on the taxable component of the death benefit.
Taxation of a reversionary pension will depend on the age of both the primary and reversionary beneficiary. If the primary beneficiary was aged 60 years or over at the time of death, the payments to the reversionary beneficiary would be exempt from tax. However, if the primary beneficiary was under age 60, the pension would continue to be taxed at the reversionary beneficiary’s marginal tax rate (less any deductible amount and pension rebate) unless the reversionary beneficiary is aged 60 or over, in which case it would be tax exempt.
A pension cannot revert to a non tax dependant. Death benefits can only be paid to non-dependants as a lump sum, so they are subject to the 15% tax on the taxable component of the death benefit.
The reforms mentioned above are due to be introduced from 1 July 2007, unless another commencement date is specifically mentioned.
So what does it all mean?
If potential retirees are able to wait until 1 July 2007 to take their superannuation benefits or start superannuation pensions, particularly where they have reasonable benefits limit (RBL) problems, they should aim to do it.
Despite this, there will be people who may unable to wait due to triggering a compulsory cashing event before 1 July 2007, such as:
- death;
- reaching age 75; or
- reaching age 65 and failing to be gainfully employed for at least 240 hours in the last financial year.
In this case, RBLs and pension planning remains relevant to those persons. However, from 1 July 2007 the pensions will start being taxed differently, including a full 15% rebate applying even if the pension was partially excessive when started before 1 July 2007.
Despite the above point, the Treasurer’s Press Release No. 57 of 13 June 2006 says that the Government proposes to bring forward the abolition of compulsory cashing to 10 May 2006. This will allow members who would otherwise be forced to take their superannuation benefits to wait until the new tax regime is introduced on 1 July 2006 before they take their benefits or draw down a pension under the roposed new pension rules.
Employees can continue to salary sacrifice as they currently are up until 30 June 2007, when the new $50,000 deductible contributions limit or $100,000 for those aged 50 years and over applies.
From budget night, a person is unable to make more than a $150,000 undeducted contribution into a superannuation fund per year. However, the Federal Government is introducing a three-year averaging rule.
As employer ETPs will not be as concessionally taxed as they currently are, from 1 July 2007, and will not be able to be rolled-over into a superannuation fund, it is important that these changes are considered so that if an executive, for example, is considering retirement he/she can make an informed decision on the timing of their departure from employment.
Once all of the laws are introduced, it will be important for superannuation fund trust deeds and member’s binding and non-binding death benefit nominations to be upgraded to reflect the substantial changes in the law.
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