Key dates for 2003

JANUARY

New family law regime

Effective December 28, 2002, changes to the treatment of superannuation benefits enable separated or divorced couples to split superannuation interests upon breakdown of the marriage.

Couples must either make a binding superannuation agreement or obtain Court orders and the agreement or order must specify the amount or percentage to be split. Couples or the court can also ‘flag’ super. This generally prevents any payment being made until the parties or the court finalise the property settlement.

While some superannuation interests can only be split when a benefit becomes payable (eg. upon retirement), most can be split immediately. This includes both accumulation and allocated pension interests.

Depending on the rules of the fund, the non-member spouse can either take a separate interest in the fund, transfer their entitlement to another fund or (where the money is not required to be preserved) receive a cash payment.

While clients will need legal advice, financial planners can assist by collecting current financial information, providing general information on such matters as reasonable benefits limits (RBLs), preservation and tax treatment of super benefits and revise financial plans after property settlement.

The new rules do not apply to same sex or de facto couples.

Compliance review of SMSFs

The Australian Taxation Office (ATO) is conducting a compliance review of self-managed superannuation funds (SMSFs) between January and June 2003. Funds selected for review should already have been notified.

MAY

Federal Budget

Due to be handed down on May 13, 2003, the Federal Budget could contain changes to superannuation following the recent release of the Senate Select Committee’s report on superannuation ‘adequacy’.

JULY

Tax planning & incomestreams

The Government has announced a number of measures to restrict the tax planning opportunities available with income stream investments. These measures are proposed to apply from July 1, 2003:

• For clarity, where an allocated pension or annuity is fully commuted, the law will require the investor to be paid the pro rated minimum income for the year up to the commutation date.

• On commencement of a new allocated pension or annuity, the ability to defer taking an income payment between April 1 and June 30 will be shortened to one month (ie. the minimum income payment can only be deferred to the next financial year where the pension commences on or after June 1).

• The loophole allowing investors to rollover from one RBL complying income stream to another and then commute within the first six months of commencement of the second income stream will be closed.

Although it will still be possible to commute within the first six months of an initial complying income stream, this will not be possible in the case of a ‘commutation funded’ complying income stream.

Quarterly SG contributions

From July 1, 2003, employers must pay nine per cent of an eligible employee’s earnings into a complying super fund or retirement savings account (RSA) on a quarterly basis.

Splitting super contributions

Members of accumulation funds may be able to split their super contributions with their spouse or de facto from July 1, 2003. This will apply to personal contributions and up to 50 per cent of employer contributions.

The rules will allow couples to take advantage of two RBLs and two eligible termination payment (ETP) low-tax thresholds. Both will be able to purchase a tax-effective income stream in retirement.

Social security changes

The Government is proposing changes to social security from July 1, 2003, including:

• Closure of both Mature Age and Partners Allowances.New applicants will be required to apply for the NewStart Allowance;

• Relaxation of the NewStart ‘activity test’ for people aged 50 and over; and

• Tightening of the work capacity test for the Disability Support Pension. Applicants must suffer an incapacity preventing them working more than 15 hours a week.

DECEMBER

Deadline for super installmentwarrants

Both the Australian Prudential Regulation Authority (APRA) and the ATO have recently warned that the use of a superannuation fund’s equity holdings to purchase installment warrants is not permitted under the SIS Regulations, which prohibit a charge over assets.

Super funds that have previously converted shares to installment warrants will have until the completion payment date or December 16, 2003, whichever is sooner, to make a completion payment or sell the installment warrants.

OTHER ISSUES

Internal rollovers & RBLdouble counting

In December 2001, the ATO published an Interpretative Decision stating that the commutation of a pension back to an accumulation interest in the same super fund (ie. an ‘internal rollover’) did not constitute an ETP. This meant that the RBL record of the original pension could not be reduced leading to double counting of some or all of the same benefit.

Following intense lobbying by the industry, the Government announced that the tax laws would be amended to rectify this issue. Subsequent discussions have also confirmed that pension-to-pension transfers in the same fund will be classified as an ETP.

These amendments should be finalised in the first half of 2003, however, no draft legislation has been released.

RBLs & reversionarybeneficiaries

In April 2000 the Government announced it would amend the taxation laws to remove an anomaly in the RBL provisions relating to reversionary income streams.

The anomaly entitles the recipient of a reversionary pension to a rebatable proportion of 1.0 (ie. a full 15 per cent tax offset) even though the original pension contained an excess amount and was not fully rebatable.

A Bill to correct this anomaly is currently before Parliament and is scheduled to take effect from the 1999/2000 financial year. Unless the Bill is amended, the ATO will have the option to recover any overpaid tax offset back to this particular year.

Outstanding superannuationmeasures

A number of superannuation measures are likely to be finalised in 2003, subject to support from opposition parties in the Senate, including:

• Introduction of a co-contribution scheme for low-income earners (up to a maximum of $1,000 pa);

• Reduction in the super surcharge by one-tenth of current levels over the next three years; and

• Change to the tax treatment of excessive superannuation ETPs to ensure an effective tax rate of 48.5 per cent.

Split loans & interestcapitalisation

The ATO is still seeking leave to appeal against the Full Federal Court decision in the Hart’s Case in relation to the deductibility of capitalised interest on the investment component of a split loan.

Until this issue is resolved the ATO will treat capitalised interest as being non-deductible. If the ATO is denied its appeal or is unsuccessful it could lobby the Government to amend the tax legislation.

The outcome of this case has implications for linked loan and line of credit arrangements that allow borrowers to capitalise interest on an investment loan and direct all repayments into a home loan.

Andrew Lawless is technicalservices manager, MLC.