The 2006 Federal Budget announced a large number of changes to the superannuation rules. These changes were made because the Government wants to simplify superannuation as much as possible. But for some employers and their employees the rule changes might require them to rethink some of their superannuation tax planning strategies.
By Alex Dunnin

KEY POINTS
The 2006 Budget has dramatically simplified the taxation arrangements for super. The biggest reform is the scrapping of the Reasonable Benefit Limit, which is the amount of super you can save before you have to start paying normal taxation rates. Superannuation payment rules are being relaxed so retirees will no longer have restrictions about how they should receive their income stream payments. Self-employed people are now eligible for most of the super incentives normally only available to employees.

The dust has now long settled on the 11th Peter Costello Federal Budget, which drew almost universal praise from the superannuation industry and interest groups for its raft of superannuation, pension and taxation initiatives and reforms. This Budget was special because it was a milestone for superannuation in Australia as it has dramatically simplified the taxation arrangements for super.

In just a single step the Government has radically simplified superannuation benefit taxes, scrapped Reasonable Benefit Limits, opened cocontributions to the self-employed, significantly eased Centrelink restrictions around how we juggle our super lump sums and our social security payments, dramatically smoothed the age-based contribution limits, and even lifted the age until we can continue to receive super contributions to 75 years. In fact if you keep working after age 65 your super is now almost entirely tax free.

The Budget also contained a range of other measures that impact superannuation, but the tax simplification changes were the most significant.

Super is about investing, not tax

The biggest symbolic reform however was the scrapping of the RBL, which is the amount of super you can save before you have to start paying normal taxation rates. Getting rid of it means just one thing: the more you put into super and the smarter you invest, the more you can expect to have when you retire. In other words, there is no longer any excuse to not save as much as you can for your own retirement, and there is also no longer any excuse why you should invest too conservatively either.

Taking advantage of these new rules also means we will all have to start thinking differently about our super. This is because it is now purely an investment and no longer just an elaborate way to dodge tax. Imagine that, you will now have to talk to your financial adviser about investment ideas rather than tax schemes.

Thinking of it now as an investment, the first thing you should ask yourself is whether you are putting enough into super each year, are your investment returns enough, is your investment strategy the right one, and are you in the right super fund in the first place?

The Government has published a comprehensive range of information about their superannuation tax reforms on their website www.simplersuper.treasury.gov.au. To help you navigate your way around the maze however, SelectingSuper has summarized some of the key elements:

Tax-free super benefits after age 60

A major aspect of the superannuation tax changes are new arrangements for how superannuation benefits will be taxed if they are paid from an already - taxed superannuation fund, meaning people receiving the money from the super fund as a lump sum, pension or income stream payment.

In essence, these benefit payments would tax-free for those over age 60 while for people below age 60 they would be taxed under rules similar to current arrangements (but still radically simplified).

The abolishing of the RBL however significantly improves things even for those retiring before age 60 because they are no longer penalised for saving large amounts of money, which dramatically boosts their incentives to save more and invest for even better outcomes.

Simplified payment rules

Superannuation payment rules are also being relaxed, meaning retirees will no longer have restrictions regarding how they should receive their income stream payments. Indeed, individuals will now be given significantly more flexibility over how much of their superannuation they take and when they take it.

For example, they will not be forced to take their benefits at particular ages (for example, age 75 or from age 65 if they do not meet a ‘work test’) as they would be allowed to take their benefits as a regular income stream or lump sum or leave their benefits in the fund and draw on them when they want.

By implication, this means the currently very complicated set of rules governing the acceptable amounts of pension payments they can take each year and the type of allowable pension products they can invest in would be simplified.

New minimum standards for all pensions will also be developed that set simpler basic restrictions such as a minimum amount of payment. If a pension meets the new minimum standards then the earnings on assets supporting that pension will continue to be eligible for an income tax exemption (as is the case currently).

The preservation age, which is the age at which retired individuals can access their superannuation, will however not be changed because it is already legislated to increase from 55 to 60 between the years 2015 and 2025. Adding to that, since 1 July 2005, a person who has reached their preservation age has been able to take their benefits as a noncommutable income stream anyway while they are still working.

 Changes to contribution rules

Age-based deduction limits will now be abolished because people can now make contributions each year up to a set limit of $50,000 per person per annum regardless of how old they are. Contributions beyond this amount but up $150,000 will be treated as “undeducted” contributions that would not be able to claim concessional taxation treatment that normally applies to super contributions.

The Government has also said it will consider trying to accommodate people making very large one-off contributions, perhaps by averaging contributions over a three year period. The Government is still working to clarify its view on this issue though.

Most importantly, as an incentive to employers to encourage them to recruit or maintain older workers, employers will now be able to receive a full tax deduction for all superannuation contributions they make for employees up to age 75.

Self-employed people, who have long been bypassed by many of the superannuation concessions and incentives, will now be eligible to take advantage of many superannuation incentives including tax deductions for contributions and the Government cocontribution scheme, albeit on the basis of an adjusted income test.

Changes to age pension tests

The 2006 superannuation Budget reforms also propose some changes to how the pension assets test and the regular assets test apply, particularly in relation to certain ‘complying’ income streams. These changes are to encourage retirees to build up more assets before they have to sacrifice pension payments. More specifically, the new rules will reduce the pension assets test ‘taper rate’ to $1.50 per fortnight for every $1,000 of assets above the ‘free area’ from 20 September 2007.

Nonetheless, to compensate the Government for relaxing this rule, the current 50 per cent assets test exemption for complying income streams will be removed from 20 September 2007. The Government has said they needed to retain the assets test exemption even under the new arrangements to stop very wealthy people accessing both the age pension and all the associated concessions.

Eligible Termination Payments

Because the 2006 superannuation taxation reforms abolish RBLs, the Government has already acknowledged it will have to modify some of the rules around Eligible Termination Payments (ETPs) because employers sometimes make termination payments to people in conjunction with superannuation contribution payments in such a way to help the individual stay under their RBL. Since this impacts superannuation contributions they are often counted together for taxation purposes.

The Government has however said that under new rules ETPs will no longer be allowed to be rolled over into superannuation.

Untaxed schemes

The fundamental essence of the 2006 Budget superannuation taxation reforms is that they lower the tax payable by people who have already paid a considerable amount of taxation through their super fund.

But if people have been a member of a scheme that has generally paid no tax along the way, eg they were a member of a tax exempt public sector scheme, it would be unfair to totally abolish their taxation liabilities when they retire in addition to them having already paid minimal tax along the way.

In the past the Government has dealt with this situation by taxing fund members from untaxed super schemes at a higher rate than members of regular super funds. Under the new measures however, the Government will continue to tax these retirees from untaxed schemes but at a discounted (or offset) rate that gives them proportional tax gains like those that apply for regular fund members but which don’t give them a completely free ride.

The new rules for these fund members will be that for those over age 60, lump sums up to $700,000 will be taxed at 15 per cent while lump sums above this threshold will be taxed at the top marginal tax rate. Correspondingly, pensions paid from untaxed schemes will be taxed at the individual’s marginal rate less a 10 per cent offset.

Finding and transferring super

The Government has also said the Australian Taxation Office will take a more active role in help super fund members find their lost super and when consolidating accounts.

This will be achieved by the Government requiring super funds to transfer money between funds within 30 days rather than the ridiculously slow 90 days as is currently allowed.

To make this happen more easily, the Government will be imposing a standard form for inter-fund transfers and also standardising the ‘proof of identity checks’ required before super funds will transfer money.

The Government has been forced to take these initiatives because despite many funds feigning a desire to encourage members to consolidate their super accounts, too any funds were putting up artificial barriers that frustrated thousands of members to the point where they would give up and not bother trying to consolidate. The fact the Government has been forced to take these steps is not something the super fund industry should be proud of.

Annuities still matter

Changing the tax rules on superannuation benefits has prompted some people to question whether we will still need products like annuities or allocated pensions. But these products will still be as important as ever even though they will primarily be used as a cash-flow management tool rather than as a way to avoid tax liabilities.

But an even more important reason why annuities and allocated pension will remain vitally important is because the Government has relaxed the taxation rules and it is now more important than ever that people properly plan and structure their retirement spending habits. The reason is simple: retirees need to make sure their retirement savings last as long as possible.

Don’t overreact, get good advice

Above all, the 2006 Budget reforms for superannuation are still being fine-tuned and finalised, meaning they are still to be paid Law. Because of this, employers and their employees should not overreact to them. And if you think they impact you and you are unsure about them, talk to your super fund and see a financial adviser.

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