The Federal Government’s 2006 Budget certainly took the superannuation industry by surprise.
The changes represent the largest overhaul of the superannuation system in over a decade.
While we have outlined in this newsletter many of the announced changes, we are yet to receive any legislation to confirm the proposed changes.
Furthermore, the industry has been requested to forward submissions on the changes by early August2006 before the legislation is released so that many of the finer details can be clarified.
Below is a summary of the proposed changes:
No tax on super payments from July 1, 2007, for those aged 60 or over, is without doubt the most significant proposed change. Once you reach 60 years of age, you can withdraw a pension, a lump sum, or the entire balance of your superannuation and pay absolutely no tax thereon.
Prior to this change there were limits on the amount of pension or lump sum withdrawals a retiree could make tax free. It should be noted that these rules continue to apply for people accessing their superannuation between the age of 55 and 60.
This proposed changed will no doubt have the effect of simplifying the system and encouraging more contributions into superannuation; whilst at the same time provide incentives for people to work till age 60 rather than age 55, which has been popular in the past.
Our aging population and historically low birth rates have significantly contributed to our shortage of skilled labour and this proposed change will encourage many to retire a little later.
Abolition of Reasonable Benefit Limits (RBL’s) is a major change to the system. The lump sum RBL of approximately $650,000 and pension RBL of approximately $1.3million have historically capped or reduced the benefits for retiree’s who wished to fund their superannuation beyond these levels.
Now people can accumulate as much as they like within superannuation with the knowledge that
a) No RBL, or cap, exists restricting taxation benefits, and
b) Once you reach the age of 60, and retire, you can access all your superannuation tax free
65 year olds no longer working will not be forced to commence withdrawing their superannuation funds as a pension or lump sum.
There are considerable estate planning opportunities which arise as a result. Essentially the kids will be left more as the tax take on your superannuation will be a lot less for a lot longer.
Changes to contribution limits mean that from July 1, 2007 a limit of $50,000 p.a. will apply to tax deductible contributions.
This universal limit replaces the current age based limits which allow those over 50 to contribute up to approximately $100,000 per annum and still obtain a tax deduction.
There is transitional relief for those aged 50 or more who can continue to make tax deductible contributions until 2012.
Un-deducted superannuation contributions will be capped for the first time from Budget night. A limit of $150,000 per annum per member will apply and it is proposed that you may be able to group 3 years worth of $150,000 into a single year and achieve a one off un-deducted contribution of $450,000.
This change will significantly alter the current practice of placing large amounts of money or assets into superannuation just prior to retirement, to utilise the concessionally taxed superannuation environment throughout retirement.
Planning will need to commence at an earlier age, as a result of all these changes.
Self Employed people who have not incorporated their business into a private company will no longer be penalised.
Under the current system unincorporated businesses were restricted to claiming as a tax deduction, contributions of $5,000 per annum plus 75% of any excess above the $5,000.
This contrasted with incorporated businesses who could claim 100% of all superannuation contributions.
This unfair anomaly has now been rectified from July 1, 2007.
Self-employed people will be able to access the Government co-contribution from 1 July, 2007 there will be no maximum pension allowed as is now the case but there will be a minimum pension.
Pension payments from superannuation will be simplified. From July 1, 2007 there will be no maximum pension allowed as is now the case but there will be a minimum pension.
Once this minimum pension is commenced the tax rate within the superannuation fund will become zero as is now the case.
The proposed minimum annual pension amounts are outlined below for pensions purchased on or after July 1, 2007:
- 4% of the account for age 55-64
- 5% of the account for age 65-74
- 6% of the account for age 75-84
- 10% of the account for age 85-94
- 14% of the account for age 95 and beyond
Preservation Ages to remain the same. That is access to super can commence from age 55 but progressively increasing to age 60 for those born after July 1, 1960.
Changes to personal income tax rates will apply from July 1, 2007.
The existing and proposed rates are outlined below:
| Now | From July 1st, 2006 | ||
| Tax Threshold | Tax Rate | Tax Threshold | Tax Rate |
| 0 – 6,000 | 0 | 0 6,000 | 0 |
| 6,001 – 21,600 | 15 | 6,001 – 25,000 | 15 |
| 21,601 – 63,000 | 30 | 25,001 – 75,000 | 30 |
| 63,001 -95,000 | 42 | 75,001 – 150,000 | 40 |
| 95,000 + | 47 | 150,000 + | 45 |
Retirement Planning of any sort needs to consider carefully the personal income tax rates applicable to investment earnings outlined above as compared to the income tax rate within the superannuation environment which are set at 15% during the accumulation phase.
Importantly you need to remember that it is the after-tax-return to the investor which is critical in analysing investments and hence the name or structure within which to hold the investment.
Centrelink asset test exemptions for complying income streams acquired after September 20, 2007 will be removed.
The 50% asset test exemption will still apply for complying pensions purchased between 20 September 2004 and 20 September 2007.
The 100% exemption will still apply for those complying pensions acquired prior to September 20, 2004.
There are proposed changes in relation to the aged pension test. Currently the pension is reduced by $3 for every $1,000 over the relevant threshold. From 20 September 2007 this will be halved, so that the pension will be reduced $1.50 for every $1,000 over the threshold.
Tax deductible superannuation contributions have been extended and are now allowed for people for up to the age of 75 years. This was previously capped for those still working to age 70.
Transition to retirement pensions will continue to be available (purchased after 1 July 2007) for those who have reached preservation age (currently 55) and have not retired. The pension will continue to be non-commutable under the current rules and will be subject to a maximum payment of 10% of the account balance (as well as the 4% minimum account balance).
Pre 1 July 2007 transition to retirement pensions under the current rules can continue.
Other changes announced in the Federal Budget which are not related to superannuation are outlined below:
Small business capital gains tax (CGT) concessions have been extended from July 1, 2006.
For the 2006/2007 and subsequent income years more small business owners will be eligible for
a) The “active asset” CGT concession
b) The “15 year exemption” to CGT
c) The retirement exemption
d) The small business rollover relief
The amendments focus on extending the eligibility criteria to 20% ownership interests (down from 50%) and “looking through” ownership structures at the shareholder level in group entities.
Furthermore the asset test threshold will be increased from $5million to $6million from July 1, 2007.
Fringe Benefits tax rate will be reduced to 46.5% (from 48.5%) to align with the top marginal income tax rate.
In addition the minor benefits exemption threshold will increase from $100 to $300.
The Senior Australians Tax Offset will be increased from July 1, 2006. Senior Australian’s will be able to earn more income without paying tax. Singles will be able to have taxable income up to $24,867 (up from $21,968) and couples up to $41,360 (up from $36,494)
Depreciation rates for business equipment will be increased for acquisitions after May 10, 2006 under diminishing value methodology.
The rate will be 200% (up from 150%) of the prime cost rate.
Family Tax benefit Part A will from July 1, 2006 now start to reduce once income is above $40,000 as opposed to the current $33,361.
Family Tax Benefit Large Family Supplement will be extended from July 1, 2006 to families with 3 or more children. The payment of $9.52 per fortnight will be paid for the third and each subsequent child.
The full tax free threshold of $6,000 will be allowed for all tax payers ceasing full time employment. This is an improvement to the current part-year pro-rata arrangements.
Carer Payment recipients will receive a one off payment of $1,000 and recipients of Carer’s Allowance will receive a $600 payment for each eligible person in their care. Child support payments will be calculated differently and based on the costs of raising children, the combined taxable income of parents and after having taken into account an amount for self-support which will be the same for each parent.
Mezzanine Finance was tipped in our last newsletter to experience some difficulties and no sooner had we gone to press than the Westpoint collapse in Perth occurred leaving mum and dad investors out of pocket to the tune of approximately $400 million.
It will be interesting to see how successful ASIC is at prosecuting the directors and promoters.
The Markets – Australian and International shares have experienced increased levels of volatility over the last two months. This volatility has been caused by increasing interest rates both domestically and internationally. Furthermore some investors have taken profits following the strong run over the past 12 months for equities.
We believe this volatility will continue for some time to come and buying opportunities may well present themselves.
Advice – Should you or a friend or colleague require some financial advice please feel free to make an obligation free appointment.