News 06/07

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

In the last edition of e-SuperUpdate we mentioned two of the announcements from the Budget that apply from 9 May 2006.  These were the changes to making undeducted contributions to superannuation and the abolition of the compulsory payment of benefits.  In the last edition we discussed our understanding of the proposed changes for undeducted contributions and how they will probably work.  In this edition we discuss the effect of the changes to the compulsory payment rules.

Until 10 May 2006 it was compulsory for the trustees of a superannuation fund to pay lump sums or commence to pay pensions when a member:

• had reaching age 65 and worked no more than 240 hours in the previous financial year;
• reached age 75 after 30 June 2004;
• was older than 75 before 1 July 2004 and ceased working less than 30 hours a week; or
• died.

The good news is that from 10 May 2006 the law has now changed so that there is no compulsory requirement to commence taking a benefit at any age, however, benefits must continue to be paid as a lump sum and/or pension on death.  The changes to the law apply to superannuation benefits where there was no compulsory requirement for a member’s benefit to be paid from a superannuation fund prior to the change in the law.  For example, a person who was 65 in April 2006 and had permanently retired at that time would still be required to have a lump sum and/or commence a pension because it was compulsory for the fund to pay the benefit under the rules applying up to 10 May 2006.

Let’s look at a short case study on how these changes work and the advantages for self-managed superannuation funds.  We will use Fred and his best friends Betty and Barney to illustrate how the changes to the rules may apply.

Fred

Fred is 69 and has been gainfully employed for less than 240 hours in the 2005/06 financial year.  Under the previous rules that applied up until 10 May 2006 Fred’s self-managed superannuation fund would be required to pay a lump sum or commence to pay a pension to him on 1 July 2006 as he had not worked 240 hours in the previous financial year.  However, in view of the change to the compulsory payment rules from 10 May 2006 Fred can draw benefits from his self-managed superannuation fund when required.  This means that Fred’s balance in the self-managed superannuation fund continues to accumulate in a tax concessional environment until he really requires the money.

Betty

Betty retired when she was 65 some years ago and is receiving an allocated pension from her self-managed superannuation fund.  When she commenced the allocated pension it was calculated correctly on the full amount of her balance in the fund.  As Betty has other sources of income in addition to her superannuation she really does not require the income she receives from his allocated pension at this stage.  In view of this Betty decides to stop receiving her allocated pension and commutes it back into accumulation phase by using an internal rollover.  An internal rollover is where a pension is returned to accumulation phase or is rolled over to commence another pension within the same superannuation fund.  As Betty is older than age 65 on 10 May 2006 if she returns her pension to accumulation phase she will subject to the new rules for cashing benefits.  This means there is no compulsory requirement for Betty to receive lump sums and/or pensions from her self-managed superannuation fund until required.

Barney

Barney was 65 on 22 April 2006 and has lived off his substantial savings after he retired from work when he was 63.  As it was compulsory for Barney’s self-managed superannuation fund to pay benefits once he reached age 65 a lump sum was paid to him on 30 April.  It is not possible for Barney to contribute the lump sum back to superannuation unless he meets the work test.  This test requires Barney work at least 40 hours in 30 consecutive days.  If he can meet the test then he could make a contribution to his self-managed superannuation fund up to the limit permitted and can leave the money in his superannuation fund until it is required.

Advantages for Self-managed Superannuation Funds

The advantages for self-managed superannuation fund with the change to the compulsory cashing rules is that a person can leave their money in a tax concessional environment until they really need it.  This now provides greater flexibility in the management of the fund and allows many funds to retain investments that would have had to be sold or transferred to pay benefits to members under the rules that applied up until 9 May 2006.