Simplified Superannuation - Final Decisions

On September 5th 2006, following considerable consultation, the Treasurer confirmed that the Government will proceed with its intention to reform the superannuation system as outlined in the Budget.

Full details of the announcement can be found at http://simplersuper.treasury.gov.au

We are pleased to be able to provide you with a summary of these changes.

Cap on Undeducted Contributions

To allow people who were going to make a large contribution to their superannuation under the existing arrangements there is a cap of $1 million for undeducted contributions made between 10 May 2006 and 30 June 2007. This will include any contributions already made during that period.

Other key points ;

• Personal superannuation contributions from an individual’s post-tax income will continue not to be taxed when contributed and may be eligible for the Government co-contribution (as currently). These contributions will be limited to $150,000 per annum.
  • People under age 65 will be able to bring forward two years of contributions and make a larger contribution of $450,000.
  • Transitional arrangements will apply between 10 May 2006 and 30 June 2007.
• Age based contributions will be abolished. Concessional deductible contributions to superannuation will be limited to $50,000 per person per annum. These contributions will be taxed at 15 per cent.
  • A five year transitional period will apply for people who are aged 50 and above to allow those planning to retire soon to make concessional contributions of $100,000 a year.
• Employers will be able to claim a full deduction for all contributions to superannuation on behalf of individuals under the age of 75. The Superannuation Guarantee will continue to apply only until age 70.
• The personal deduction eligibility rule will be simplified by making it consistent with the rule that currently applies for the Government co-contribution.
• All contribution limits in the plan (except those related to transitional arrangements) will be indexed in $5,000 amounts.

What happens if I exceed the cap ?

It was proposed to require contributions in excess of the cap to be returned to the individual. In addition, any earnings on that amount were to be taxed at the top marginal tax rate. Following consultation, the Government will not proceed with this proposal. Instead, contributions in excess of the cap will be taxed at the top marginal tax rate (plus Medicare levy). The liability for this tax will be levied on the individual who will nominate a superannuation fund to release monies to pay the liability. The balance of the excess contribution will be able to remain in the fund.

Are there exemptions to the cap?

The proposed plan indicated that the Government would consider exemptions to the cap. Contributions above the cap will be allowed in the following circumstances:

• the proceeds from the disposal of assets that qualify for the small business capital gains tax (CGT) exemptions (that is, the 15-year exemption and the $500,000 retirement exemption) up to a lifetime limit of $1 million (indexed). This will also apply to assets that would have qualified if they were not pre-CGT assets or if disposed after the permanent disablement of the owner including where the asset was owned for less than 15 years; and
• the proceeds from a settlement for an injury resulting in permanent disablement.

Payment of Superannuation benefits

• The rules for when individuals can voluntarily choose to access their superannuation will not change — that is, individuals will still be able to access their superannuation once they reach preservation age and are able to take their benefits, and from age 65 even if they have not retired.
• An individual will not be compelled to draw down their superannuation once they reach a particular age. They will be free to draw on it as and when they want.

Individuals will be able to choose the amount they take from their pension each year. A minimum amount will be required to ensure that the capital is generally drawn down over time. The minimum pension payments are set out below.

• Pensions will continue to receive favourable tax treatment. However, the rules defining a pension will be simplified.
• If a person chooses to take a pension, they will be able to take out as much as they like when they like, provided a minimum amount is taken each year.

Taxation of benefit payments

• Superannuation benefits paid from a taxed source either as a lump sum or pension will be tax free when paid to people aged 60 and over.
• Superannuation benefits paid before age 60 will be taxed in a similar manner as they are now.

• Lump sums will have two components — an exempt component and a taxable component (there are different rules for payments from an untaxed source).
• The exempt component will be tax free. The exempt component will comprise: the pre-July 1983 component, the CGT exempt component, the post-June 1994 invalidity component, the concessional component and undeducted contributions.
• The taxed component (the current post-June 1983 component and the non-qualifying component) will be tax free up to the low-rate threshold and taxed at a maximum rate of 15 per cent above the threshold. For those aged under 55, this component will be taxed at a maximum rate of 20 per cent. This is the same treatment as currently applies to the post-June 1983 component.
• The low rate threshold will be set at $140,000 on 1 July 2007 and indexed to Average Weekly Ordinary Times Earnings (AWOTE) in $5,000 amounts.

• RBLs for superannuation will be abolished.
• The current concessional tax treatment of invalidity payments will be extended to the self-employed.

Death Benefits

Lump sum death benefit payments will be tax free if paid to a dependant. The definition of dependant will remain as currently defined in the Tax Act. The taxable component of a lump sum paid to a non-dependant will be taxed at 15% (this is currently the case for the post-June 1983 taxed element).

Death benefits will be able to be paid as a pension to a dependant from the accumulation phase where the member dies before commencing a pension.

However, where the pension is paid to a dependant child, the pension will be required to be commuted (tax free) once the child reaches age 25 (unless the child was permanently disabled).

Pensions will not be able to revert or be paid to a non-dependant on death and will have to be paid as a lump sum.

Existing Allocated Pensions

Members of existing allocated pensions will be allowed to transfer to the new pension products (that meet the new minimum standards) from 1 July 2007, without the need to commute their existing pension. This will potentially save many people the cost and administrative burden of commuting their existing pension to satisfy the new minimum standards.

Self Managed Super Funds

To allow the improved regulation of self managed funds the Government will increase funding to the ATO to carry out compliance activities as well as education campaigns for trustees and auditors. They have also announced the introduction of one single annual return. This form will include the annual regulatory return, tax return and member contribution statement.

The Government has also announced new administrative penalties will be introduced for failure to lodge returns and for making false or misleading statements. The supervisory level will also be increased from $45 to $150 and fringe benefits tax will no longer apply to in-specie employer contributions.

Contribution incentives for the self-employed

From 1 July 2007, the self-employed (and other persons who are currently eligible for a deduction) will be eligible to claim a full deduction for their superannuation contributions up to age 75.

The Government co-contribution scheme will be extended to the self-employed, effective from 1 July 2007 provided they satisfy the existing eligibility criteria for the co-contribution.

If you have any questions on how these changes may impact on your superannuation, please contact this office.