Superannuation from 1 July 2008

Significant changes were made to superannuation from 1 July 2007. These reforms will improve retirement incomes, will make superannuation easier to understand and provide retirees with greater flexibility in accessing their super in retirement.

Key Changes

	Reasonable Benefit Limits abolished.
	Benefits paid from a taxed fund are generally tax-free for members aged 60 or over.
	There are now only two components of super interests being tax-free and taxable components.
	There is no longer a requirement for the compulsory payment of benefits to members who are over 65 and don’t meet the work test or have attained the age of 75 years.
	Employer contributions can be made for employees up to age 75 if they meet the work test after age 65.

Changes to Contribution Limits and Terminology

The Reasonable Benefit Limits will effectively be replaced by annual contribution caps. There are two main types of caps:

Non-concessional contribution cap - this applies to contributions that are not tax deductible (previously called Undeducted contributions). An annual cap of $150,000 applies from 1 July 2007. After age 65 and up until age 75 the member must meet the work test to be able tocontribute. Non-concessional contributions are not allowed after age 75.

A “three year” cap of $450,000 applies if a member wants to bring forward two years of future contribution entitlements. The member must be 64 or under at 1 July of the year when this “bring forward” is triggered.

Concessional contribution cap – this applies to employer contributions or personal tax deductible contributions. An annual cap of $50,000 per person per year applies from 1 July 2007. A transitional cap of $100,000 per year applies from 2007/08 to 2011/12 for persons aged 50 or over at any time during this period. Self employed persons (including those aged 65 to 74 and meeting the work test) and taxpayers under 65 without superannuation support will, from 1 July 2007, be able to claim a full tax deduction for their contributions up to the caps mentioned above.

Significant penalty taxes apply where the caps are breached.

Contributions in excess of the Non-concessional cap will be taxed at 46.5%.

Contributions in excess of the Concessional cap will be taxed at a penalty rate of 31.5% in addition to the 15% tax payable on these contributions.

Government Co-contribution

Both the employed and self employed who make an after tax, personal contribution to superannuation will be entitled to the government co-contribution of up to $1,500 per annum. The actual co-contribution will depend on the amount contributed and an income test. In the 2008/09 financial year, the co-contribution will only be made in full where a person earns less than $30,342 and will taper offas the income rises to $60,342 per annum. No other family means test applies for the 2008/09 year making this a worthwhile strategy for many lower income spouses.

Transition to Retirement Pensions

From 1 July 2005 members aged 55 or over have been able to access their superannuation benefits while still working via a Transition to Retirement Pension (TTR). The new pension rules from 1 July 2007 require a minimum pension payment of 4% of the account balance and a maximum of 10% annually. A TTR can be used to supplement income if you wish to work part time. Alternatively, you may wish to continue working full time and salary sacrifice more heavily into superannuation while supplementing your income with the pension payments. A consequence of commencing a TTR is that it converts the fund to pension status and income tax is no longer payable on the fund’s earnings or capital gains. Fresh contributions into the fund however would still attract 15% tax and would be held in a separate taxable accumulation account for the member.

A restriction attached to this type of pension is that lump sums cannot be withdrawn until you turn age 65 or retire. The TTR can, however revert back to accumulation phase at any time.

Changes to Superannuation Splitting

Although superannuation splitting is arguably less relevant following the abolishment of reasonable benefit limits, it may still be relevant for estate planning purposes and as a safeguard against further changes to superannuation.

A member can split eligible contributions in the financial year following the year in which the contributions were made. The changes made at 1 July 2007 restrict the contributions that can be split. From the 2008/09 year 85% of concessional contributions up to the concessional cap for that year made in the preceding year may be split.Non-concessional contributions of any type cannot be split.

New Income Stream Standards (previously Allocated Pensions)

From 1 July 2007 account based income streams will have an annual minimum payment limit, but no maximum limit. The minimum payment will be determined by multiplying the account balance at commencement, or 1 July, by a certain percentage based on the member’s age.

While members must take at least the minimum payment each year, with the exception of TTR’s there is no maximum limit imposed. Members aged over 60 who have retired or resigned from employment can withdraw lump sums tax free. These funds can be used for any purpose including providing pre-inheritance financial assistance to children.

The percentage factors are as follows:

Existing Allocated Pensions

Most existing allocated pension streams will be able to convert to the new minimum payment rules from 1 July 2007 without the need to commute their existing pension and repurchase an income stream.

Some members may wish to consolidate two or more pension accounts into one account. This may apply where a fully rebateable pension account and a non-rebateable pension account have both been established as a result of excess benefits at the time of earlier commencement. With the abolition of reasonable benefit limits this separation is no longer required. In order to consolidate the two income streams into one, a member needs to commute both income streams and roll them over into one new account.

The adoption of the new minimum payment rules should reduce the cash flow withdrawal requirements from many funds as a lower pension amount will be required to be paid.

Estate Planning Issues to Consider

From 1 July 2007, lump sum death benefits will continue to be tax free if paid to a dependant. The definition of a dependant remains as currently defined by the Tax Act. This includes a spouse, a child under 18, a financially dependant child between 18 and 25, a financial dependant (other than a non-disabled child over 25) and an interdependent person.

Under the superannuation laws the taxable component of a lump sum paid to a non-dependant will be taxed at 15% plus medicare levy even though the member may have turned 60 and have been eligible to withdraw the money tax-free during their lifetime.

Death benefits can still be paid as a pension to a dependant from the accumulation phase where the member dies before commencing a pension. However, where the pension is paid to a dependant child, the pension will be required to be commuted (tax free) once the child reaches age 25 (unless the child is permanently disabled in which case it can continue).

Pensions will not be able to revert or be paid to a non-dependant on death and will have to be paid as a lump sum and any taxable component will be liable to tax and medicare levy as mentioned above.

If a member aged over 60 were to make a withdrawal from their superannuation fund and give it to their adult children before they die the funds would be passed on tax-free.

Therefore there is a need to continue to consider appropriate strategies and obtain ongoing Estate Planning advice.

Published : 18 September 2008