Simpler super, but don’t rule out legislative risk

When the Federal Treasurer, Peter Costello, handed down the 2006-07 Budget in May announcing far-reaching changes to Australia’s superannuation and transition to retirement arrangements, he created a new dynamic for both financial planners and superannuation fund executives.

However, the capacity for financial planners to act on the Budget changes was limited by the fact that the Treasurer immediately initiated a consultation period allowing the financial services industry and other interested parties to comment and suggest refinements to the Government’s outline.

That consultation period ended in late July and the bottom line for financial planners is that the scenario broadly outlined by the Treasurer in his May Budget speech will be implemented largely unchanged.

However, it will likely be early 2007 before the necessary legislation is in place to underpin the Government’s changes.

The key element of the Government’s package is the removal of tax on superannuation benefits taken after the age of 60.

The other key Budget changes included:

~ the abolition of reasonable benefit limits and age-based contribution limits;

~ greater flexibility for individuals as to how and when they wish to draw on their superannuation in retirement;

~ allowing the self-employed to claim a full deduction for their superannuation contributions and be eligible for the Government co-contribution for their personal post-tax contributions; and

~ halving the current pension taper rate to $1.50 from September 20, 2007.

Announcing confirmation of the changes after the consultation period, Costello claimed they represented the most significant reform of the taxation of Australia’s superannuation system in decades.

“The changes will sweep away the current raft of complex tax arrangements, improve retirement incomes and increase incentives to work and save,” he said.

“As a result of the consultation process, transition arrangements will be put in place to make the transition to the new superannuation system easier, improve administration and improve the integrity of the superannuation system.”

He said those arrangements were as follows:

~ subject to any applicable work test, people will be able to make up to $1 million of post-tax contributions between May 10, 2006, and June 30, 2007, which will allow people who were planning a large contribution under the existing rules to do so;

~ the $150,000 annual limit on post-tax contributions will commence from July 1, 2007. People aged less than 65 will be able to bring forward two years of contributions, enabling $450,000 to be contributed in one year, with no further contributions in the next two years.

~ in addition to the annual cap, people can contribute:

• a lifetime limit of $1 million from the sale of small business assets that have been held for 15 years; and

• settlements for injuries resulting in permanent disablement;

~ indexation of the contribution caps to Average Weekly Ordinary Time Earnings in increments of $5,000 to make it easier for people to understand how much they can contribute to superannuation;

~ the arrangements to administer the contribution caps will be streamlined;

~ there will be transitional arrangements for employer eligible termination payments that were specified in existing employment contracts as at May 9, 2006, and are paid before July 1, 2012;

~ the concessional tax treatment of the employee invalidity benefits will be extended to the self-employed;

~ new arrangements to encourage people to quote their tax file number to their superannuation fund including: a Government funded education campaign; allowing people up until June 30, 2008, to quote their TFN before the withholding tax need apply; a refund of any tax withheld for a period of up to four years; allowing quotation of a TFN for employment purposes to be treated as being for superannuation purposes; removal of the $1,000 threshold for accounts commenced from July 1, 2007; and the ATO using its systems to improve the quotation of TFNs;

~ the concessional amount of lump sum benefits from an untaxed source will be increased from $700,000 to $1 million; and

~ the regulation of self-managed superannuation funds (SMSFs) will be improved by increasing funding to the ATO for compliance activities, streamlining reporting requirements and other measures. The supervisory levy will be increased to $150, which will place SMSFs on a similar cost recovery basis as other superannuation funds.

Costello said the changes and the inclusion of administrative costs would add $1 billion over the forward estimates, bringing the total cost to $7.2 billion.

He said the Government’s intention was for the legislation implementing the measures to be introduced into Parliament before the end of the year.

The changes have been broadly welcomed by the financial services industry, with the Financial Planning Association (FPA) not only suggesting they would provide a boost, but providing examples of how clients could benefit.

It said many certified financial planners were working through the options with clients and looking at the opportunities that flowed from the transitional arrangements announced by the Government for the Simpler Super proposals.

The FPA pointed to a number of planning scenarios covering varying age groups.

Planning for the 30 to 40 year olds

From June 1, 2007, the limit on deductible contributions will be set at $50,000 for those under 50 years of age. This means people will need to start saving for retirement much earlier and not wait until a few years before retirement to place large sums into superannuation.

Scott Brouwer of Outlook Financial Services said this limit would require a change in thinking and careful planning to create long-term retirement savings.

“It requires a mindshift to move more money into super earlier and those aged 35 to 40 are the right age to contribute because they will have sufficient years to build a superannuation nest egg,” Brouwer said.

“People should be considering contributing more than the 9 per cent super guaranteed by the Government.”

David Richardson of Symes Warne and Associates said salary sacrificing had become even more attractive with the removal of reasonable benefit limits.

“The benefits of this form of regular saving can be increased further by matching asset allocation to the client’s risk profile and savings goals, which will also be amplified by compound interest earned in the fund.”

Planning for those in their 50s

Those in their 50s will be able to make deductible contributions to super of $100,000 each year until 2012.

This is a significant short-term opportunity to boost superannuation savings during peak earning years.

Philippa Elliot of Momentum Planning said a reconsideration of current savings patterns might be in order.

“If you have cash or other assets that can support your lifestyle expenses, you could potentially consider salary sacrificing a large percentage of your income to super. It can save considerable amounts of tax and build your retirement nest egg very quickly,” she said.

Planning for those in their 60s

From July 1, 2007, people under 65 will be able to make undeducted contributions into super of up to $150,000 each year or $450,000 in one year, with no further contributions in the next two years.

At the same time, when drawing a lump sum or an income from super it will be tax free for those aged over 60.

“This provides a fantastic opportunity for those approaching age 65 to structure their assets to provide them with tax-free income for their retirement,” Richardson said.

“However, those in their 60s should ensure that they do not waste any time in reviewing their affairs so as to make the best use of the contribution limits.

Self-employed/small business

From July 1, 2007, self employed people can claim full deductions for super contributions and may be eligible to contribute $1,000 to super and the Government will match it with up to $1,500 as a co-contribution.

From that date, small business owners will be able to place up to $1 million of the proceeds of the sale of a business asset that has been held for more than 15 years into super at any time.

“These changes recognise the role small businesses play in the working lives of many Australians and offer further opportunities for small business owners and the self employed to boost their retirement savings,” Brouwer said.

— Mike Taylor