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The new super bonanza |
This article is written with some optimism that the Federal Government is starting to get it right when it comes to superannuation. But there is also some trepidation.
The Government announced far-reaching changes to superannuation at the time of the May budget in an effort to make it simpler. These reforms are much needed and well overdue.
They were put out for public comment and last month the Government announced the final version of these changes. However bitter experience has shown that legislation by press release is not always reliable. Substantial changes are often made in the drafting stages of the legislation and the associated regulations. The Senate can also put its nose in and muck up the process.
Nevertheless the changes in essence, if not detail, should go ahead as announced. They mean many people will have to rethink their retirement strategies and in some cases take action before July next year.
The only sour note is that the changes apply to those who retire after the age of 60 effectively putting pressure on people to retire later. Existing rules will apply to those retiring between age 55 and 60.
Tax on benefits
While there have been a great number of changes, the most beneficial relate to the way benefits that are paid from superannuation are taxed.
Up to now this has been extremely complex. So complex in fact that a whole new industry has developed the financial planning industry that specialises in giving retirees advice on how to structure their retirement income.
For example under current arrangements there are eight different ways a lump sum payout can be taxed. If you decide to take a pension there are a variety of different types, all with different tax and social security outcomes. If you make a mistake it can be extremely costly to your net income.
Under the new measures that will come into force in July 2007, the taxation of benefits from a super fund will be tax free providing you are at least 60.
You will be able to withdraw the entire amount as a tax free lump sum any time you like.
You can take it as a superannuation pension again all tax free.
You can even just leave it in there and let it accumulate.
As part of the changes, Reasonable Benefit Limits will be abolished. If its in super then you will be able to take it out tax free. This will have a number of effects:
- All those fancy strategies of withdrawing money from super and recontributing it as an undeducted contribution to reduce tax in retirement will be totally unnecessary.
- Splitting contributions with a spouse (only just introduced) will become redundant if the purpose was to split incomes in retirement to cut tax.
- The changes will give a boost to estate planning because you will be able to leave your money in the fund untouched for your beneficiaries when you die. If the beneficiary is a dependant, the amount will not be taxed.
- There will also be a bigger incentive to hold assets through a superannuation fund rather than directly now that RBLs and the tax on benefits will be removed.
- We could also see a big boost in the number of self-managed superannuation funds. The Government appears to have anticipated this effect and has boosted the resources of the Tax Office to monitor these schemes.
Tax on fund earnings
Generally, tax will continue to be imposed on earnings within a superannuation fund 15 per cent on income and 10 per cent on capital gains.
However if the money in the fund is used to support a complying superannuation pension, then no tax will be payable on fund earnings.
When you combine this with the elimination of tax on benefits, super becomes very attractive indeed.
Many of the restrictions on what counts as a complying pension have been relaxed.
The main requirement will be that you pay yourself a minimum amount from the fund each year. These minimum amounts are aged-based which means for example if you are aged between 65 and 74 you only need to withdraw five per cent of the account balance each year to qualify.
Contributions
To compensate for the removal of the tax on end benefits and to stop blatant abuse, the Government will place a limit on the amount that can be put into super. This is where a bit of planning needs to be done now.
Between now and the end of June next year investors will be allowed to contribute $1 million into their super funds as an undeducted contribution (contributions for which a tax deduction has not been claimed). After that the limit will be $150,000 a year.
Special rules will apply to the sale of a small business.
Tax deductible contributions will be limited to $50,000 a year from July next year with the old age based limits abolished.
As a transitional arrangement, those aged 50 or more will be able to claim a deduction of $100,000 a year until 2012.
Further strategies will no doubt unfold once the detailed legislation has been put through Parliament.
In the meantime, its time to reassess.
David Tomlinson is a freelance finance journalist based on the Northern Rivers.
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