Financial planning reform - the state of play

The 2011 financial year brought many changes to the financial services industry, and many are yet to come. John Perri has provided a snapshot of the activity coming out of the Federal Parliament from a technical financial planning perspective.

With global sharemarkets volatility dominating discussions on superannuation and retirement, it can be easy to lose sight of the activity coming out of Federal Parliament from a technical financial planning perspective.

Given the new financial year is well under way, now is a good time to highlight some of the key developments passed by the Federal Government.

Reduction in minimum pension requirements

There is a 25 per cent reduction in standard minimum annual superannuation pension income requirements for 2011-12 – an extension of the 50 per cent reduction enjoyed by some in recent years. The Government has also indicated no reduction will apply from 2012-13 onwards.

Excess concessional contributions - ATO discretion

Legislation has been passed allowing the Australian Taxation Office (ATO) to make a formal determination to disregard or reallocate contributions for the purposes of excess contributions tax (ECT) without first issuing an ECT assessment.

This will permit a person to request the ATO to use its discretionary power at an earlier time. However, the ATO will only be able to make a determination after it is satisfied all contributions that are to be potentially disregarded or reallocated for that year have been made.

Importantly, there is no change to the criteria used in determining whether a favourable determination should be made.

Deductibility of TPD premiums by superannuation funds

From 1 July 2011, super fund trustees are only allowed to claim a tax deduction for the cost of total and permanent disability (TPD) insurance premiums, to the extent that the definition of TPD in the insurance policy is aligned with the definition of “disability superannuation benefit” used for income tax purposes.

While this represents a shift from recent practices, the Government has moved to make this process more streamlined by allowing the percentage of TPD insurance premiums a superannuation fund is allowed to claim as a tax deduction –  which would be specified in tax regulations.

According to draft regulations, a deduction for TPD insurance premiums will broadly be available as follows:

Concessional contribution cap for individuals aged 50+ - consultation paper

The Government has released a consultation paper in relation to its announcement that from 1 July 2012 individuals aged 50 and over, with total superannuation balances below $500,000, will be allowed to make up to $50,000 per year in concessional superannuation contributions.

The paper presents a broad overview of how the concessional contributions caps for individuals aged 50 and over will operate – although, it should be noted that these are preliminary views only.

A key parameter of the paper is in the design of the account balance of less than $500,000 – including whether or not to include those who have commenced drawing down their superannuation.

Industry submissions on this paper have now closed.  At the time of writing, final details had not been released.

Low income earners government superannuation contribution - consultation paper

The Government has released a consultation paper regarding the proposed introduction of a low income earners government superannuation contribution.

Under this measure, the Government proposes to provide a superannuation payment of up to $500 annually for eligible low income earners directly into the individual’s account. This payment will be separate, and in addition to the existing Government co-contribution. 

The paper suggests the amount payable under this measure will be calculated by applying a 15 per cent rate to concessional contributions made by, or for, eligible individuals on, or after, 1 July 2012 – up to a maximum annual payment of $500 (not indexed).

To be eligible, an individual must have an adjusted taxable income of up to $37,000 (not indexed).

Industry submissions on this paper have now closed. 

Refunding excess concessional contributions - consultation paper

A consultation paper has been released in relation to the Government’s announcement to introduce a ‘once only’ option for eligible individuals to have their excess concessional contributions refunded. Once refunded, these contributions would then be assessed at the individual’s marginal tax rate, rather than incurring excess contributions tax.

Importantly, refunded concessional contributions will not be included in any non-concessional cap calculations.

The closing date for submissions has passed.

50 per cent tax discount for interest income — consultation paper

The Government proposes to allow individuals a 50 per cent tax discount for interest income, including interest received from deposits in banks, building societies, and credit unions, as well as from bonds, debentures, and non-superannuation annuities – whether it is received directly or indirectly, such as via trusts and managed funds.

The discount will apply on up to $500 of interest in the 2012-13 income year (ie, a $250 discount) and $1,000 in subsequent years (ie, a $500 discount).

Commencement and cessation of an income stream - draft ATO ruling

The ATO has issued a draft taxation ruling (TR 2011/D3), which considers when a superannuation income stream commences and when it ceases. These concepts are relevant to determining the taxation consequences for both the superannuation fund and the member in receipt of the income stream payments.

The contents of this draft ruling come as little surprise. They are views that have been the subject of discussions with the ATO since 2004. Additionally, they are likely to be views that are primarily relevant to advice provided to the self-managed superannuation fund (SMSF) sector.

This ruling is still in draft format – as such, the final version may vary following industry consultation.

More may yet come

In addition to the changes above, there is a raft of other measures still in the pipeline, including a gradual increase of SG contributions to 12 per cent. 

One catalyst for further technical developments is likely to be from the Stronger Super Peak Consultative Group (SSPCG). The SSPCG was tasked with providing the Government with broad and high level advice on the design and implementation of the Stronger Super (Cooper) reforms.

Separate working groups were formed to consider more technical input on key components of the reforms such as SuperStream, MySuper, SMSF measures, and broader consumer, governance and regulatory issues.

The SSPCG has handed its report to the Government, which contains their recommended reforms to Australia’s superannuation industry. The industry now awaits the Government’s response to this report, expected to be released mid to late September.

John Perri is technical services manager at AMP.