After two years of not much change to superannuation following the launch of better Super in 2007, the second Rudd-Swan Budget in May 2009 sets the scene for some of the most significant reforms to super since the introduction of Award Super more than twenty years ago. 
By Alex Dunnin

KEY POINTS
The 2009 Federal Budget announced a series of measure to cut the public cost to taxpayers of some superannuation benefits, eg. the concessional cnotribution caps have been slashed, the co-contribution matching rates have reduced, the pension bonus has been removed and the pension age is been lifted. But to offset these they are significantly boosting the age pensions, their indexation rates and making the system more flexible, eg by halving the pension draw-down limits. They are also changing the rules around lost accounts and have signed a deal with the NEw Zealand government to facilitate transfer of superannuation arrangements across the Tasman.

Superannuation looks set for some more reform following two years of quiet since the Howard-Costello government introduced the Better Super tax reforms in 2007 that saw super effectively become tax-free. 

But this time the reforms aren't about the usual run of minors nips and tucks. The reforms being suggested by the Rudd government are fundamental and extend to basic structure of the system.

It doesn't mean super won't still be the centre of most Australian's savings strategy; it's jsut that they want to restore some balance into the system and remove some of the excessive tax breaks that too often only favoured the wealthiest super fund members. 

To achieve this, the government has integrated a review of the taxation arrangements inside superannuation into the Henry Tax Review and set-up a thorough review of the Superannuation System which is being lead by Jeremy Cooper, a former deputy head of Australian Securities and Investment Commission. The report for the Henry is due end 2009 and the Cooper Review is due to report end 2010.

The government hasn't waited for these reviews before doing anything however and has already used the 2009 Federal Budget to announce some major changes concerning contribution limits, the co-contribution, pension drawdown changes, capital gains tax changes and of course major changes to age pension rates themselves.

Reduction in concessional contributions cap

The maximum annual contributions for which fund members will be able to claim tax concessions has been reduced from $50,000 down to $25,000, effective from 1 July 2009. This cap will continue to be indexed. 

While the reduction drew strong industry criticism, the government said only a small number of fund members would be impacted. Reinforcing this, the peak superannuation industry association, the Association of Super Funds of Australia (ASFA), said only four per cent of members make contributions above $25,000.

There will be a range of transitional arrangements, such as concessional contributions caps for those over age 50 years being reduced but only from $100,000 to $50,000 until the 2011/12 financial year. The transitional caps will however not be indexed.

The non-concessional contributions cap will remain at $150,000 for the 2009/10 financial year, and will only increased by indexation. In future years the non-concessional contributions cap will be calculated as six times the level of the indexed concessional contributions cap.

Co-contribution

The co-contribution was introduced by the Howard-Costello government to encourage low to middle income earners to make additional personal contributions. It worked by the government topping up voluntary personal (ie non employer paid) contributions by up to 150 per cent.

For example, a fund member earning $25,000 who made an extra personal contribution of $1000 would receive an additional $1500 from the government, taking the total contribution to $2,500.

While the government has not abandoned the scheme, it has watered it down so the top-up boost (called the 'matching rate') drops from 150 to 100 per cent so in our example the extra contribution paid by the government only matches what the member paid.

This reduction in the co-contribution matching rate will operate until the 2011/12 financial years, after which the government has said it will climb back to 125 per cent for contributions made in the following three financial years. From 2014/15 the government will restore the 150 per cent rate.

Salary sacrifice

While the government didn't officially revise the rules around salary sacrificing, they have however continued to ttighten the definition of income so all income is treated similarly. The major reason for doing this is they are concerned some people manupulate the ways in which they receive income so they can maximise government benefits like childcare subsidies or to avoid child suppoer payments.

For superannuation, this means from 1 July an employer will be required to show all salary sacrifice contributions on an employee's PAYG summary and these contributions will be included in the calcuation of an individual's assessable income to determine their eligibility for numerous existing tax and other Government support benefits.

These measures mean individuals will no longer be able to salary sacrifice to qualify for the Self Employed Contributions (unable to reduce employment income below 10 per cent), Co-contribution, and Superannuation Low Income Earning Spouse Rebate.

 Minimum drawdown on account-based pensions

During the worst of the Global Financial Crisis many superannuants complained to the government that they needed to withdraw more money from their retirement fund accounts but that they didn't like having to take the relatively large sums the law required especially if they just needed extra money for hosuehold bills.

Responding to this need for more flexibility, the government announced in the 2009 Federal Budget that the minimum drawdown amounts on account-based pensions for the 2009/10 financial year will be halved.

This extends the drawdown relief the government announced in the second half of 2008/2009. This change is intended to help people who need their retirement fund pension payments but who also need assistance as their account balances recover from capital losses associated with the now passing global recession.

These changes do not impact Transition to Retirement arrangements (TTRs) for which there have been no changes.

Small and lost super amounts

When super funds lose contact with a fund member they were previously required to transfer the member's balance to an Eligible Rollover Fund, where the money was usually conservatively invested as they waited for the chance event that the member may contact them to claim their money.

The government estimates such lost funds amount to about $15 billion. While this is a large amount, it is nonetheless only 0.01 per cent of all superannuation - meaning in the grand scheme of things it is a relatively small problem.

The changes mean from 1 July 2010 superannuation providers will be required to transfer lost superannuation accounts that are less than $200 or where they have not had contact with the member for five years, to Austarlian Tax Office to administer.

Former account holders will of course be able to reclaim their money from the Australian Taxation Office at any time. 

Capital gains tax changes to assist fund mergers

One of the advantages of Australia's superannuation system is that there are many super funds and so the investment risks are spread around the system. But there can be a downside to this in that some funds may be too small to take advantage of their economis of scale, for example, funds may be so small that they are unable to negotiate the same fee discounts from their service providers that larger super funds can.

Reacting to this some funds have been joining with other funds or merging into them completely as that can sometimes be in the best interests of their members.

To facilitate funds doing this more easily, the government has enhanced the optional capital gains tax loss roll-over for complying superannuation fund mergers that was first announced at the end of 2008. It will work by the government extending the roll-over period by one year to 30 June 2011 so that superannuation funds will have more time to use the rollover relief.

The measure will not also apply to mergers involving pooled superannuation trusts where the continuing entity has at least five members and to mergers involving the complying superannuation business of life insurance companies.

The measure will permit merging superannuation entities in a net capital loss position to elect to roll over assets with accrued capital gains as well as assets with accrued capital losses.

Trans-Tasman portability

The Australian Government has agreed in principle to the signing of a memorandum of understanding with the New Zealand government to establish a trans-Tasman retirement savings portability scheme.

The trans-Tasman portability scheme will permit transfers of superannuation savings between certain Australian superannuation funds and New Zealand KikiSaver funds. 

Changes to the age pension

Pensioners who receive the Age pension, Disability Support Pension, Carer Payment, Veterans' Service Pension, Income Support Supplement, War Widow/ers Pension, Bereavement Allowance, Wife Pension and Widow B Pension will all be benefit from pension reform that includes in some cases substantial payment increases.

In summary, the government has agreed to increase age pensions for couples by four per cent or $527 per annum (combined) or to $13,182 per annum each. Single pensioners will receiev an extra $1,664 per anum or $32 per week, bringing their new annual pension to $17,472.

This brings the single rate of pension up to two-thirds of the combined couple rate.

Another major development is that age pensions will now be indexed to a new retirees' cost of living index rather than the normal consumer price index. This new measure, which increases far more quickly than normal inflation, is expected to see age pensions better keep pace with changes in retirees actual living costs.

The Government also announced that the pension payments will be simpler to understand and more flexible by incorporating four existing fortnightly and quarterly allowances into a single fortnightly Pension Supplement. From 1 July 2010, pensioners on the new arrangements will also have the choice of receiving about half of the Pension Supplement on a fortnightly or quarterly basis.

The Governemnt has as well agreed to improve pension flexibility by improving the existing arrangements for accessing advance pension payments. 

Pension age, income test and bonus payment 

The government announced that because Australians are living longer, they will be progressively increasing the age at which people can claim the age pension from the current 65 to 67 years age. The change will be phased in slowly over eight years.

The Government will change the pension income test eligibility rules to ensure the largest pension increases are targeted to those who need them most. They intend doing this by increasing the pension income taper rate from 40 to 50 cents for single pensioners and 20 to 25 cents for pensioner couples.

Finally, the pensioner bonus system, which was designed to reward people for staying in the workforce longer, is being phased out for new entrants from September 2009. The phase out is because it is seen as inconsistent with other measure to limit contributions for high income earners, extend pension rates and lift the pension age. 

Don’t overreact, get good advice

Like the case with all superannuation rule changes, employers and their employees should not overreact to them. If you think they impact you and you are unsure about them, talk to your super fund or see a financial adviser.

<< Back to Learning Centre