News 05/06

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

SMSFs and the budget Proposals for Superannuation

This year the federal budget was handed down on the 9 May 2006, with major changes to Superannuation, particularly in relation to the way benefits will be taxed and a tightening of contribution levels. The effective date for most of the new rules is 1 July 2007.

Please note that this summary contains an overview of the key changes. However, because the Government is inviting feedback on these superannuation proposals, it is quite possible that some changes may occur before they are made law.

In summary the main elements of the proposals are:

Abolition of the Reasonable Benefit Limits (RBLs) for everyone.

The government announced that from the 1 July 2007 RBLs will no longer apply irrespective of the person’s age or type of benefit payment. This will mean that lump sums or pensions that are paid from a fund will not need to be reported to the Australian Tax Office.

People older than 60, benefits paid from a fund Tax Free.

Lump sums and pensions paid from a Superannuation Fund to anyone who has reached the age of 60 will not be taxed and therefore not included in assessable income.

There are now significant incentives to delay retirement until after 1 July 2007, and consideration should be given to moving non super assets to superannuation. Planning is even more important for those already receiving an income stream or those heading to retirement.

Between age 55 and 60

For those between the ages 55 and 60, lump sums and pensions will continue to be taxed as per the table below:

The exempt component is received tax free, the tax free amount is $129,751 for the 2005/06 financial year.

Under 55

Lump sums and pensions will continue to be taxed for those under age 55 in a similar way to current rates. The taxed part of the lump sum to be taxed at 20%.

New Type of Pensions Proposed

From the 1 July 2007 all pensions will be required to meet a single set of standards and would consequently be taxed in the same fashion.

• Annual minimum payments will need to be met however there is no maximum amount.
• There will be no requirement for a residual at the end or conclusion of the pension.
• It would also appear that the benefit can only transfer to one dependent or otherwise can only be cashed as a lump sum to the estate.

Pensions commenced before 1 July 2007 that meet the existing pension rules will be deemed to meet the new standards and all income from assets held in the pension would continue to be tax exempt.

Proposed minimum annual pension payments, are detailed below:

In relation to Complying Pensions and Term Allocated Pensions, arrangements are unclear as to how they will be treated. We will keep you informed once we know how these income streams will be treated.

Death benefits from a taxed source

All lump sums under the new arrangements paid to a dependant would be tax free. Payments of a reversionary pension to beneficiaries would depend on age at the time of death of the beneficiary.

• Age 60 and over payment would be tax free.
• Age under 60 taxed at reversionary marginal tax rate less any deductible amount and offset.

Contributions

Under the budget proposal there will be restriction limits placed on Tax Deductible Contributions and Undeducted Contributions.

Taxable Deductible Contributions
From the 1 July 2007 age based contributions will be abolished. There will be no restrictions on the amount of tax deductible contributions that can be made to a fund. However, the first $50,000 of tax deductible contributions made each year for anyone under age 50 will be taxed at 15% in the fund. For those aged 50 and over, the first $100,000 of the deductible contributions will be taxed at 15%. The higher level for those 50 and over will apply until 2012, when it will revert to $50,000. Any tax deductible contributions in excess of the relevant amount will be taxed at the top personal tax rate.

Undeducted Contributions
From 9 May 2006, a proposed limit of $150,000 will be imposed for post-tax undeducted contributions that can be made each year. The Government is considering averaging these payments over three years to accommodate larger one off payments. Any amount in excess will be refunded and any earnings taxed at top personal tax rates.

Self Employed

Good news for self employed, from the 1 July 2007 you will be able to claim a full deduction for contributions made to a superannuation fund.

These changes make the reason for having a self managed superannuation fund even more attractive. We think that the proposed changes will probably increase the number of self managed superannuation funds. Even if all of the proposals in this year's budget become law you will continue to have the same control and flexibility over your fund's investments and potential cost advantages.