Toolbox: Take a new year technical stocktake

It’s going to be a busy year for financial planners and their clients, with a raft of key legislative measures taking effect and substantial progress expected on others. There’s also a Federal election in the wind so further changes may be announced or proposed during the ensuing election campaign.

To save you from having to trek through this technical landscape without a guide, here’s a snapshot of the measures and events to watch out for in 2004, including those measures that have become law in the last six months, those progressing through Parliament, and the measures yet to be introduced.

Mark these dates in your diary:

What was passed in the last six months?

nFlow through of the rebatable proportion for excessive income streams, effective from July 1, 1999.

nInternal eligible termination payments (ETP) rollover issue fixed, effective from July 1, 2001.

nReduction in the tax rate on the excessive component of ETPs, effective from July 1, 2002.

Taxation Laws Amendment Bill (no.5) 2003 received royal assent on December 17, 2003. It contained a measure reducing the tax on the excessive component of ETPs paid from taxed superannuation arrangements.

Previously taxed at 47 per cent plus the Medicare levy, the tax cut will reduce the post-June 1983 taxed element of an excessive component to 38 per cent plus the Medicare levy. The remainder of the excessive component, as well as excessive components created from untaxed sources, will continue to be taxed at 47 per cent plus the Medicare levy.

n$1,000 matching Government co-contribution from July 1, 2003.

The Government will match contributions made by low-income earners with a Government co-contribution of up to $1,000 per year. The maximum co-contribution will be available where assessable income plus reportable fringe benefits amounts to less than $27,500. It will be phased out where income exceeds $40,000 per annum.

This measure will only apply where an individual is not entitled (due to employer superannuation support) to claim a tax deduction for these contributions. This is an important point, and financial planners will be able to assist their clients in determining their eligibility or otherwise for this measure.

Low income earning employees who have the means to make this contribution (for example, through inheritance), and couples where one partner is earning less than $40,000 (and preferably less than $27,500) can benefit from this new measure. The idea of receiving a 100 per cent return on a $1,000 contribution will no doubt be an attractive prospect to clients.

nSuperannuation surcharge reduction of 0.5 per cent from July 1, 2003(with further reductions of 1 per cent on July 1, 2004 and 2005).

nMinor income stream changes from October 1, 2003(including the change of the ‘April 1’ rule to the ‘June 1’ rule for new allocated pensions).

What is making its way through Parliament?

nSplitting superannuation contributions with a spouse (proposed July 1, 2004).

If passed, this legislation will allow employer and personal contributions to be split with a spouse. The benefits of this strategy include taking advantage of two tax-free thresholds and reasonable benefit limits.

This Bill was referred to in the Senate Economics Legislation Committee which delivered its report on December 5, 2003. According to the report, the Federal Government’s preferred option is to split contributions at the end of the year, while the ALP and Democrats prefer splitting of benefits at eventual retirement. Debate will resume on this bill in February.

nChoice of fund (proposed July 1, 2005).

This Bill is still on the agenda and is to be debated in the Senate when Parliament resumes in February.

What is yet to be introduced?

nTransfers of overseas superannuation.

The Government has responded to recommendations made by the Senate Select Committee Report on the taxation of transfers from overseas superannuation funds.

The report stated that the Government supports treating the taxable growth created since the individual became a resident as a ‘taxable contribution’ in the fund (where transferred into Australia more than six months after the individual becomes a resident). Therefore, contributions tax of up to 15 per cent will apply.

Currently, this growth is included in the individual’s assessable income and subject to the person’s marginal rate of tax (up to 47 per cent plus the Medicare levy).

Legislation to implement this change has yet to be introduced.

nGrowth pensions.

The financial services industry believes there should be a range of income stream options for retirees to consider and has been lobbying the Government for some time to introduce a market linked income stream (known as growth or account-based income streams).

In the recent Senate Select Committee Report ‘Planning for Retirement’, it was recommended the Government consider the appropriateness of the current restrictions on the purchase of complying annuities to encourage the availability of growth pensions.

Given this measure was raised by the Government as part of its 2001 Federal election proposals, and with a Federal election to be held within 12 months, it is expected the Government will move on this issue shortly.

nProposed bankruptcy changes.

Late last year the Federal Government announced it had moved to make changes to close an apparent loophole in the bankruptcy laws by introducing amendments that will allow bankruptcy trustees to recover contributions made to superannuation funds by bankrupts.

Among other things, the proposed changes will:

l Enhance claw-back provisions by giving bankruptcy trustees the power to recover ‘excessive’ personal contributions above an annual limit of $5,000 made by bankrupts from after-tax money prior to bankruptcy; and

l Allow superannuation contributions to be recovered where they were made within an intention to defeat creditors.

John Perri is technical services manager,AMP Technical and Professional Services .