Proposed Changes

The proposed superannuation changes announced in the Federal Budget are open for public comment until 9 August 2006. Most initiatives are proposed to commence from 1 July 2007.

The content for our highlights update is sourced from a number of specialist budget commentaries including AXA, Federal Treasury and the mainstream press.

Impact on Self Managed Superannuation Funds

The effect of the proposals:

• Limits substantial contributions into super from both taxable and undeducted contribution sources
• Impacts the transferring of high value real business property into a fund
• Reduces the need for RBL management
• Removes the requirement to commit a portion of pension funds to a complying (non-commutable) income stream

Lump sums after age 60

All lump sum superannuation benefits paid from a taxed fund would be tax free for people aged 60 and over. There will be no reasonable benefit limits (RBLs).

Lump sums prior to age 60

Tax would still be paid on benefits paid to individuals under the age of 60. However, the components of a lump sum are to be simplified with more components now tax exempt.

The exempt components now include pre-july 83, concessional, undeducted contributions, post-june '94 invalidity and capital gains tax exempt.

The annual tax-free threshold (currently $129,751) will remain.

Pensions after age 60

All pension payments from a taxed source would be tax free when paid to individuals aged 60 or over, including pensions that commenced before 1 July 2007. There would be no reasonable benefit limits (RBLs).

Pensions prior to age 60

These will still be taxed although the components of a lump sum are to be simplified with more components now tax exempt.

When the undeducted purchase price is determined it will now include all of the new exempt components.

The exempt components include pre-july 83, concessional, undeducted contributions, post-june '94 invalidity and capital gains tax exempt.

This will have the effect of further reducing the taxable portion of the pension income.

The full pension rebate of 15% will continue to apply to all pensions paid from a taxed fund if the individual is aged between 55 and 59.

Once the pension recipient turns 60, their pension would be tax-free.

Death benefits

All lump sum death benefit payments will be tax free if paid to a dependant. The taxation of a pension paid to a reversionary pensioner would depend on the age of the primary and reversionary pensioner.

This will make life and TPD insurance within super more attractive due to the removal of RBLs.

Preservation Rules

These will not change.

Benefits at age 65

There will no longer be a requirement to compulsorily take superannuation benefits at age 65.

Combined with the abolition of RBLs, this provides new estate planning and asset protection opportunities as individuals will be able to retain funds in the accumulation environment without being required to draw down upon reaching age 65.

Simplifying pension rules

The new minimum standards for pensions commencing on or after 1 July 2007 would require:

• Payments of a minimum amount to be made at least annually, allowing pensioners to take out as much as they wish above the minimum (including cashing out the whole amount)
• No provision to be made for an amount to be left over when the pension ceases
• That the pension could be transferred only on the death of the pensioner to one of their dependants or cashed as a lump sum to the pensioner's estate.

The payment rules would specify minimum limits only. No maximum would apply, with the exception of pensions that are commenced under the transition to retirement condition of release.

Transition to retirement pensions

No more than 10 per cent of the account balance would be able to be withdrawn in any on year.

Contribution Rules

Age-based deduction limits for all ages will be replaced with a new annual contribution limit of $50,000 from 1 July 2007.

Transitional arrangements have been proposed for people aged 50 and over.

Undeducted contributions

Undeducted contributions will be capped from 9 May 2006 at $150,000 per year, with consideration given as to whether the cap should be averaged over three years to accommodate large one-off payments.

Self-Employed Contributions

Self-employed contributions will be fully deductible up to the annual contribution limit.

Employer ETPs

Employer eligible termination payments (ETPs) would be comprised of two components - the exempt component and the taxable component. The exempt component comprising pre-july 83 and post-june '94 invalidity will be exempt from tax. The taxable component (the post-June '83 amount) would be taxed at 15 per cent for amounts up to $140,000 for individuals aged 55 and over and at 30 per cent for those aged under age 55.

Amounts in excess of $140,000 would be taxed at the top marginal tax rate.

This provides a great incentive for individuals to rollover employer ETPs into superannuation, particularly with the removal of RBLs.