Changing superannuation

By Rod Brown

As part of the Commonwealth's Budget statement, the Government announced a series of proposals with the intention of significantly changing the treatment of superannuation benefits and in particular for those who retire at age 60 or older.

A period of consultation was also announced, operating from Budget night on May 9 until August 7 with legislation to follow and an implementation date for most proposals from July 1, 2007.

The proposed changes are intended to significantly simplify the tax arrangements that apply to superannuation benefits at the point at which they are taken. The proposed changes would also introduce new contribution limits, as well as other changes aimed at simplifying the superannuation system.

Teachers are cautioned to consider the proposed arrangements at the point they are finalised in legislation and then seek professional advice from those that are licensed by the Australian Securities and Investment Commission (ASIC) to give such advice.

The Government's proposals would provide for tax free superannuation benefits at age 60 or over. Benefits between age 55 and 59 would still be subject to some tax. Reasonable Benefits Limits (RBLs) will be abolished for everyone. Preservation rules will not change under the Government's proposals, that is, it will still be necessary to satisfy a condition of release, for example, retirement.

There are also new, proposed rules for taxation on death benefits which are currently subject to the pension RBL. From July 1, 2007 these amounts paid to dependants would be tax free.

Earnings on lump sum assets left in a superannuation fund would be taxed at 15 per cent. Earnings on income stream assets, for example, an allocated pension, could be left in a fund with investment earnings on assets tax free.

The work test for cashing of a superannuation benefit at age 65 and over and the compulsory withdrawal of such benefits at age 75 has been abolished with effect from May 10, 2006.

Age based contribution limits to a superannuation fund will be abolished. There is a proposed deductible contribution limit (that is, employer or salary sacrifice contribution) of $50,000 per year commencing July 1, 2007 which would be subject to a concessional rate of 15 per cent with transitional arrangements for those above or turning age 50. The Treasurer has hinted that he is amenable to increasing this figure to $100,000 per year and it is possible there will be changes in the final legislation.

There will be an undeducted contribution limit of $150,000 per person per year and $450,000 per three year period commencing May 10, 2006.

A deducted contribution is an amount deducted before tax such as an employer contribution, including salary sacrifice contributions. An undeducted contribution is an after tax contribution.

Deductible contributions over the limits will be taxed at top marginal tax rates. Undeducted contributions over the limits will be returned to the member.

There will be three different tax scales for:

• benefits taken under age 55
• benefits taken between 55 and 59
• benefits taken after 60 (tax free).

The proposed changes are sweeping and may significantly alter how teachers consider their retirement and financial arrangements. Accordingly teachers should seek individual advice according to their circumstances.

Note: This article is for information purposes only. The Federation and author disclaim all liability and responsibility to any person who relies, or partially relies, upon anything presented or omitted in this article.

Rod Brown is a Welfare Officer.

For further information

August 2006 contents