Federal Budget 2006 - Super and Tax Changes
During the May 2006 Federal Budget the Treasurer foreshadowed significant changes to both superannuation and tax laws. After a period of consultation, which was completed in August, the Government has made further changes to the proposals and clarified some of the proposals previously announced. A brief summary of the major proposed changes follows:
- The removal of all benefit taxes for superannuation benefits paid to people aged 60 and over from a taxed source (such as HESTA) either as a lump-sum or pension.
- The abolition of Reasonable Benefit Limits (RBLs).
- Self-employed people to be able to claim a full deduction for contributions to age 75 as well as being eligible for the Government co-contribution scheme for personal (after-tax) contributions.
- Age-based limits on employer deductions for super contributions to be abolished. Concessional deductible contributions to superannuation will be limited to $50,000 per person per annum. These contributions will be taxed at 15%. This same rule would apply to self-employed persons. A transitional arrangement will be in place for individuals aged 50 years or over between 1 July 2007 and 30 June 2012 to enable deductible contributions in the amount of $100,000 rather than $50,000. Amounts contributed in excess of the deductible contribution limits will be taxed at the top marginal tax rate plus Medicare and will be payable by the individual. The individual may elect to have their superannuation fund release monies to pay the liability.
- From 1 July 2007, after tax member contributions to be limited to $150,000 a year or $450,000 averaged over three years (under age 65) on a "bring forward" basis. Between 9 May 2006 and 30 June 2007 undeducted contributions of up to $1 million may be made provided relevant work tests are satisfied.
- More flexibility for those wanting to leave money within the superannuation system, with individuals no longer being forced to take their superannuation upon reaching certain age limits.
- Funds only to be able to accept undeducted (member after-tax contributions) if the member's tax file number (TFN) has been quoted. In addition, the top marginal tax rate plus Medicare levy applies where taxable contributions for a pre 1 July 2007 member exceeds $1,000 and no TFN has been quoted. This $1,000 threshold will not apply for accounts opened on or after 1 July 2007.
- Employer ETPs no longer able to be rolled over into super. Transitional arrangements will be put in place for individuals with employer ETPs specified in existing employment contracts at 9 May 2006, provided payment is made prior to 1 July 2012. These employer ETPs can also be rolled over into superannuation until 1 July 2012.
- Income tax reduced from July 2006, with the maximum tax rate (excluding the 1.5% medicare levy) reducing to 45%.
- Fringe benefits tax reduced from 48.5% to 46.5%, with effect from 1 April 2006.
- The rules relating to pensions to be simplified so that minimum standards are set for all pensions. Where the pension meets the new minimum standards, fund earnings in respect of those pensions to be tax free. Existing pensions that meet current requirements are deemed to meet the new minimum standards. Where an individual takes a pension from 1 July 2007 payments of a minimum amount must be made at least annually. No maximum amount will be prescribed, with the exception of transition to retirement pensions where no more than 10 percent of the account balance (at the start of each year) can be withdrawn in any one year.
- The 50% assets test exemption for social security purposes (Centrelink payments) to be removed for new complying pensions from 20 September 2007.
- The age pension assets taper to be halved from 20 September 2007 so recipients would only lose $1.50 per fortnight (rather than $3) for every $1,000 of assets above the relevant threshold.
Please note that this summary only provides highlights of the extensive changes that have been proposed by the Federal Government. The majority of these proposals have a start date of 1 July 2007, although there are some other commencements dates outlined in the budget for pension products and member contribution limits. This information is based on the Trustee's understanding of the Budget proposals and is not meant to be a substitute for relevant personal advice. The Trustee suggests that you consider obtaining professional advice regarding your own circumstances. More detailed information is also available from www.budget.gov.au and www.simplersuper.treasury.gov.au
Super Changes in 2005/2006
The May 2005 Federal Budget contained a number of superannuation proposals, including the removal of the superannuation surcharge on high-income earners from contributions and termination payments made on or after 1 July 2005.
2006 sees a new raft of new and revised super legislation that looks set to shake things up a bit.
Superannuation Guarantee Late Payment Offset
The Government has made changes to the superannuation guarantee law to provide some relief for employers from penalties in cases where superannuation guarantee contributions are paid to the super fund shortly after the quarterly cut-off dates.
Under the new law, which was effective from 1 January 2006, if employers make a contribution to a super fund for an employee which is late but before the due date for lodgement of their Superannuation guarantee quarterly statement the employer can elect to have this contribution used to reduce the amount of superannuation guarantee charge they have to pay that relates to that employee.
The changes under the new law also include an extension in the due date for lodgement of the Superannuation guarantee quarterly statement. The new due date for lodgement has been extended by 14 days to the 28th day of the month after the cut-off date for payments to the super fund.
More detailed information is available at http://www.ato.gov.au/super
Back payment of wages changes
The Government has made changes to confirm that the superannuation guarantee law compels employers to make super contributions on salary or wages paid back to former employees in order to reduce liability to the superannuation guarantee charge. This change is effective from 1 January 2006.
For example if employers paid back salary or wages to a former employee, they would be required to make super contributions on that back pay. If they do not make the required superannuation guarantee contributions, they will be liable for the superannuation guarantee charge.
More detailed information is available at www.ato.gov.au/super
Super splitting
The Government has introduced new laws that will allow individuals to split their superannuation contributions with their spouse under certain circumstances. Contributions made on or after 1 January, 2006, are eligible to be split where funds choose to offer this service to its members. (HESTA members are able to split contributions). Not just after-tax contributions either, you can direct your 9% superannuation guarantee (SG) contributions into their account as well as any salary sacrificed contributions. The maximum amount able to be split is 85% of taxed splittable contributions and 100% of untaxed splittable contributions.
Please note: From 5 April 2007, Government legislation no longer allows the splitting of non-concessional (undeducted) contributions with a spouse.
More detailed information on superannuation contribution splitting is available atwww.ato.gov.au/super
Transition to Retirement
The new Transition to Retirement rules allow you to receive regular payments in the form of a non-commutable income stream from a super fund, without the need to retire. This measure applies once you reach your preservation age ie between 55 and 60, depending on your date of birth. This means you may be able to switch to part time work without reducing your income. It may also provide an opportunity to significantly grow your wealth before full retirement. Please note that the new Budget proposals due to commence form 1 July 2007 have flagged that an individual will not be able to take out more than 10% of their annual opening balance when utilising a transition to retirement pension.
Further information on the “Transition to retirement” is available from www.ato.gov.au/super
Same-sex partners to be considered as potential beneficiaries
The definition of who is eligible to receive tax-free superannuation death benefits (up to the deceased’s pension reasonable benefit limit has been expanded to include an “interdependency relationship”. This is defined as a close personal relationship between two people who live together, where one or both provides for the financial support, domestic support and personal care of the other. This means that same-sex partners, siblings and adult children caring for elderly parents may be eligible, and also includes a person with a physical, intellectual or psychiatric disability who may live in an institution but is still interdependent with the deceased.
The regulations specifying matters that are, or are not, to be taken into account in determining whether there is an interdependency relationship commenced on 11 November 2005. The regulations provide that the following matters are to be taken into account by a Trustee when making such a determination:
- all the circumstances of the relationship including where relevant:
(i) the duration of the relationship;
(ii) whether or not a sexual relationship exists;
(iii) the ownership, use and acquisition of property;
(iv) the degree of mutual commitment to a shared life;
(v) the care and support of children;
(vi) the reputation and public aspects of the relationship;
(vii) the degree of emotional support;
(viii) the extent to which the relationship is one of mere convenience; and
(ix) any evidence suggesting that the parties intend the relationship to be permanent; - the existence of a statutory declaration signed by one of the persons to the effect that the person is or was in an interdependency relationship with the other person.
The regulations distinguish between the support and care given by a mere friend or a flatmate and that provided in a close personal relationship. The provision of domestic support and personal care under an employment contract, contract for services, or on behalf of another person or organisation, does not amount to an interdependency relationship.
Keep building your nest egg even if you are no longer working
From 1 July 2004, anyone under the age of 65 can contribute to super regardless of how many hours they work.
The work contribution rules for super fund members aged between 65 and 74 have also been simplified. Previously, members aged between 65 and 74 had to satisfy a 10 hour per week test. However, under the reforms introduced by the Federal Government these members will be able to make contributions for the whole of the financial year provided that they work at least 40 hours in a consecutive period of 30 days.
However, you should also note that there have also been recent changes to the compulsory cashing of benefits. As part of the May 2006 Budget proposals, the Government has also announced that the requirement for compulsory cashing of benefits to members over age 65 who do not meet the above work test will be removed. This will have an effective date of 10 May 2006.
Other changes impacting on your superannuation
- Employer paid Eligible Termination Payments rolled into a superannuation fund after 1 July 2004 are subject to preservation.
- Members transferring their overseas superannuation directly to an Australian superannuation fund more than six months after becoming an Australian resident can elect to have part of the payment treated as a taxable contribution in the Australian fund.
- Portability regulations, which apply from 1 July 2005, now allow for the consolidation of accounts in certain circumstances.
This information is based on HESTA’s understanding of the Acts and regulations as at 14 September 2006. It is not a substitute for professional advice.