BALDWINS • FoodLegal
Australian Lawyers and Consultants
Date: 20 August 2008 Time: 21:38:46
Copyright © Baldwins
1998-2006
Superannuation Revolution In 2006 Federal Budget
By Joe Lederman
Managing Principal,
BALDWINS Australian Lawyers and Consultants
© May 2006 (updated June 2006)
The announcements by the Australian Federal Treasurer, Peter Costello, in his 9 May 2006 Budget speech concerning superannuation reform offer a huge simplification of what has become a very complex regulatory system.
The cynics might argue that these changes have been driven by the “baby boomer generation” which dominates the head of the public service. The public servants were not favourably disposed to the Superannuation Industry’s own proposal to drop the contributions tax. Such a proposal would only have provided tax relief for the private sector employers and members. In addition, the Government’s Future Fund is siphoning off a huge part of the budget surplus to be used as provision for the unfunded liabilities of the old public service “defined benefit” superannuation scheme, which will generate pensions that were promised only to this generation of public servants, while the younger generation of public servants will be confined to the new scheme which offers accumulated fund benefits only.
The tax exemption announced in relation to retirement benefits will benefit the same generation that received a free university education in Australia. Will the generation of students who now pay HECS be given the same privilege of a tax-exempt retirement?
Ignoring this political cynicism, the big changes will have a revolutionary effect on retirement planning strategies.
For instance:
People will be able to access their superannuation money from the age of 60 in a tax-free form irrespective of whether the benefit takes the form of a lump sum or pension.
Superannuation fund members will not suffer tax penalties by reason of successful investment accumulation by their superannuation fund. The concept of RBLs and excessive benefits will cease to operate under the new rules.
From 1 July 2007 there will be new limits on tax deductible contributions to superannuation funds. These limits replace the age-based limits.
The fact that there will be transitional arrangements will immediately encourage those who are aged over 50 and who have the funds to do so to begin to contribute amounts that would exceed the proposed contribution limits of $50,000 per annum for tax-deductible contributions and $150,000 per annum for post tax contributions (ie what were previously known as member-financed “undeducted contributions”). In other words, people who have already attained the age of 50 will not be limited to the above limits until 2012.
Subject to the above monetary limits, a self-employed taxpayer will be able to claim a full tax deduction for his or her member-financed contribution instead of being limited to a tax deduction capped at $5,000 plus 75 percent of the contribution in excess of the $5,000.
Under the changes, employers will be able claim the full tax deduction for all superannuation contributions up to the $50,000 per member per annum they can make for employees up to the age of 75, and not be limited to the amount of the mandatory superannuation contribution.
People will be able to access their superannuation monies without tax liabilities from the age of 60. This is irrespective of whether the amount of the benefit takes the form of a lump sum or pension. The benefit entitlement will be triggered by the member turning 60, even if that person continues to work. This is a major public policy shift (given that previously all government pronouncements had been pitched towards forcing people to defer taking their benefits until later in age, and the previous existence of restrictions on access to lump sum payments). The final details will need to be scrutinized to see whether there are other conditions attached.
Prior to this change people were forced to take their superannuation after the age 65 if they were no longer working.
Life insurance taken out through superannuation funds was previously an unattractive proposition because the end benefit if the member had no surviving dependants would be taxable compared with tax exemption for life insurance proceeds on policies for which premiums were not claimed as tax deductions and not being taken out though the superannuation fund.
Members may now want to effect extra life insurance cover to boost the amount in their superannuation fund at date of death for their surviving family members and as a means of passing intergenerational wealth to their children in a tax-free form. For example, the tax-free life insurance proceeds released by the superannuation fund on death can be used to pay off the family investment mortgages. Furthermore, the definition of a 'dependant' is now a broader one.
In effect, this Federal Budget may encourage people to consider taking out life insurance through superannuation contributions and claimed as tax deductions for the premiums as a means of making provision to pay out their large private debts (debt in the private investment sector has built up astronomically in the past 20 years since the banking system was freed up and borrowing capacity has been encouraged by the prolific number of lenders).
With the abolition of Reasonable Benefit Limits, death benefits paid as a lump sum to a dependant will be tax-free. Where a lump sum payment is to a non-dependant, the taxable component post the tax free threshold will be taxed at 15 percent.
Death benefits paid as a reversionary pension to a non-dependant can still be tax-free where the recipient is aged 60 and over. Where the non-dependant reversionary beneficiary is aged under 60, the pension would be taxed at the recipient’s marginal tax rate less any deductible amount. A rebate can still apply.
It is proposed that golden handshakes and other similar ETPs will not be able to be rolled over into a superannuation fund. There will be a cap of $140,000 to limit the total concessional tax treatment for these payments.
For example, any pre July 1983 service component or any post June 1994 invalidity amount will remain tax exempt. The taxable component relating to post July 1983 amounts would be taxed at 15 percent to $140,000 for recipients aged 55 and over, and at 30 percent for recipients under age 55.
Amounts over the $140,000 threshold will be taxed at ordinary marginal tax rates.
From 20 September 2007, the current 50 percent assets test exemption for complying income streams will be removed. This recognises the fact that, instead, there is to be a reduction in the assets test tapering. This tapering will be halved from the current rate of $3 per fortnight per $1,000 of assets above the free area to $1.50.
The intended effect of the assets text exemption measure is to make it difficult for wealthy individuals to access the Aged pension and associated concessions. For complying income streams purchased prior to 20 September 2004, the full 100 percent exemption of those funds from the assets test remains. For those complying income streams between 21 September 2004 and prior to 20 September 2007, the 50 percent assets test exemption will continue to apply.
Despite a low inflation environment in relation to consumer goods and services, Australians have witnessed a hyperinflation in relation to capital assets such as Australian real estate and Australian listed shares. In effect, the substantial high borrowings by the Australian private sector are being repaid by means of the realization of these capital appreciated assets. Yet the borrowing continues without abatement, and many Australian taxpayers would prefer not to have to sell their capital assets to repay their debts.
From the viewpoint of the Australian external balance of payments, the Federal government may be in a bind. On the one hand, Australia's foreign debt would be cheaper to repay if the Australian dollar appreciated against the US dollar because so much of the Australian external debt is sourced from the US and lent or invested using US dollars. However at the same time, the Australian government and the Reserve Bank of Australia would be disinclined to allow an excessive upward revaluation of the Australian dollar against the US dollar because of the potentially adverse impact on many Australian exporters who denominate their trade in US dollars. The Australian government might consider solving this conundrum by relying on the Chinese government continuing to reinvest more of its surplus reserves into gold and other metal commodities rather than into US dollar investments; and also encouraging the Chinese to buy more Australian dollars such as by increased Australian export trade with China (including the encouragement of more Chinese tourists and students coming to Australia) and possibly allowing a major strategic investment by the Chinese government in Australia.
Meanwhile, by encouraging extra life insurance to be created by Australians via the new superannuation system, the Federal government might, in effect, be creating an opportunity for Australians to increase their equity in assets that were funded by substantial private borrowings, to the extent that capital asset inflation does not do the full trick. The latest superannuation changes should also be viewed as part of this big picture.
Joe Lederman acts for clients in estate planning, superannuation and revenue law. He is accredited by the Law Institute of Victoria as a specialist in Tax Law and Business Law, and also acts for numerous food companies. He is editor of www.foodlegal.com.au
Further information about these changes can be found here.
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