Big changes to superannuation

Last month’s Federal Budget delivered by Treasurer Peter Costello announced sweeping changes to superannuation in a bid to encourage an increase in retirement savings. As from July 2007, there will be a reduction of taxes on superannuation benefits and a relaxing of the Pensions Assets Test. Together with the changes to marginal tax rates, this package represents tax savings for most people and is particularly appealing to those on higher incomes and planning for retirement.

No tax on superannuation payments

Both lump sum and pension superannuation payments beyond the tax-free amount are currently taxed. As from 1 July 2007, there will be no tax payable on benefits paid by a taxed superannuation fund for people over 60 years of age. This includes both lump sum and pension payments. Therefore, if you are thinking about retirement before 1 July 2007, you will need to consider how you will receive your superannuation benefits. Prior to that date, the benefit amounts that you withdraw may be subject to tax.

RBLs abolished

Rules currently exist stipulating how much superannuation you are able to accumulate to receive favourable tax treatment. In another highly significant change, this Reasonable Benefit Limit (RBL) will now be abolished. This will encourage many people to put more into their superannuation to fund retirement and estate planning knowing that it will be far more tax effective.

Contribution Rules

Given the increased tax advantage for superannuation savings, the Treasurer also announced new contribution rules which will impose an across-the-board limit of $50,000 per annum on deductible (pre-tax) contributions irrespective of age and income, effective 1 July 2007.

Transitional arrangements for people over 50 years of age will be established so that the new rules will not be fully implemented until 2012. In this case, the limit is expected to be $100,000 per annum.

There will also be a $150,000 per annum limit placed on undeducted (after tax) contributions effective from 9 May 2006 although this amount is still being reviewed. However, if you are considering making a large, one-off undeducted contribution, you may need to rethink your strategy.

Other implications

All lump sum benefits paid to a dependant, such as insurance death benefits, will be tax free from 1 July 2007. With the abolition of RBLs, strategies such as holding insurance in your superannuation become more attractive.

You will now be able to keep your superannuation benefits in your fund with no age restriction applying. Earnings will still be taxed at 15% but at no stage will you be required to draw a pension. Therefore, if you do not need an income from your superannuation investments they can be retained in your fund indefinitely.

The budget announcements will radically overhaul Australia’s superannuation system. Saward Dawson believes that they give people much greater incentive to invest in their superannuation.

Strategies still need to be considered on how to gain the most from your superannuation. We would be pleased to help you plan for your retirement.

Published : 7 June 2006