200607 Federal Budget Superannuation proposals

1
2006/07 Federal BudgetSuperannuation proposals

• Stephen Barnett
• 25 July 2006

2
Disclaimer

• The information provided in this seminar is
  provided in good faith and is based on the
  information provided in the Commonwealth Budget
  explanatory papers. Until such time that the
  supporting legislation is enacted, the
  information remains a proposal, rather than law.

3
Big picture

• Great budget for those with 5-10 years of work
  left.
• OK budget for those receiving Commonwealth
  superannuation pensions but have already retired.
• Bit of a non event for those self funded retirees
  who have already retired.

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Three Major Announcements

• Personal Taxation Changes
• Simplification of Superannuation System
• Social Security Measures

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Reductions in Personal Income Tax

• Effective 1 July 2006
• Rates exclude Medicare Levy of 1.5

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Low income tax offset

• ? from 235 to 600 per year.
• Current income threshold at which offset begins
  to reduce is 21,600 to 27,475.
• Proposed income thresholds to increase from
  25,000 to 40,000.

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Changes to tax scales

• Negative gearing loses value
• In 2004/05, a taxpayer with an 80 000 income
  would get a refund of 4850 back on a 10 000
  gearing loss.
• In 2006/07, the same income and same loss will
  produce a refund of 3335
• The investment has to work harder to the tune
  of 1515 per annum.

8
Changes to tax scales

• Packaging to superannuation allows a reasonable
  amount of income.
• Salary packaging should concentrate on income at
  the 40-45 marginal rate
• For taxpayers in 2006/07 this will not start
  until 75 000.
• Taxpayers can still take home 75 000 in salary
  and not pay more than 30 marginal rate.

9
Changes to tax scales

• Salary packaging to fringe benefits becomes less
  attractive
• With the FBT rate at 46.5, it is higher than the
  vast majority of Australians will pay through the
  PAYG system
• Packaging of cars etc, under review.

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Superannuation Changes - 1 July 2007

• Taxation of benefits
• Tax free lump sum if age 60.
• Reasonable Benefit Limits abolished.
• No changes to preservation rules.
• Two new ETP components
• Tax exempt
• Taxable

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Tax on super age 60 over
12
Taxation of lump sum benefits under 60
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Taxable Component
14
Taxation of lump sums from public sector funds
(PSS MSBS)
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Simplified payment rules

• Take a single lump sum
• Withdraw amounts as lump sums when the need
  arises
• Convert accumulated entitlements into a pension
  meeting minimum standards, or
• Leave the benefits in the accumulation phase
  indefinitely.

16
Should you delay receiving superannuation lump
sum until age 60 or 1/7/07

• Example of someone 55, with CSS lump sum of 300
  000, start date 1/1/70.
• Undeducted contributions 80 000
• Pre 1983 component 111 240
• Post 1983 component 108 760
• What tax is payable?

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What tax is paid
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When is it important

• Of most significance for those who have exceeded
  one of the lump sum tax thresholds.
• Post 1983 low tax threshold
• Reasonable benefit limit
• Strategy will be to take what you need now, and
  roll over the rest until the new arrangements

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Pension payments from 1/7/07

• Untaxed schemes (like CSS/DFRDB)
• Under age 60 taxed as per new PAYG rates.
• Over age 60 from 1 July 2007 receive 10 offset.
• Taxed schemes (allocated pensions etc)
• Under age 60 taxed as per new PAYG rates with
  annual deductible amount and 15 tax rebate.
• Over age 60 from 1 July 2007 tax free

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PSS
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Do you need to retire after age 60?

• NO
• Those choosing to retire before age 60 will pay
  the current tax arrangements on their pensions
  until age 60 or 1/7/07 (the latter), and then the
  new arrangements will apply.
• Pensions do not need to be stopped and restarted.
  

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CSS/PSS pensions
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CSS/PSS pensions tax as a under new rates
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How do Commonwealth pensions compare to other
income streams

• Allocated pension
• 15 tax on the way in
• 0 tax on the way out

• Cwealth pensions
• 0 on the way in
• 0 - 19.35 on way out
• Not worse off until CSS pension exceeds 71 400
  pa

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0
(1)
15
lt15
(2)
0
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New Pension Rules

• Apply to new pensions purchased after 1 July 2007
  (existing pension rules grandfathered).
• Require a minimum payment at least annually (no
  maximum).
• Earnings will remain tax exempt.
• Undeducted purchase price includes all new exempt
  components (i.e. Pre 1 July 1983 concessional)
• New Deductible amount full 15 pension rebate
  applies to pensions from a taxed fund if aged 55
  to 59 years.

27
New minimum pension payments
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Strategy point for those with an allocated
pension at 1/7/07

• Where a person is 55-59
• Stopping and restarting could lead to a greater
  tax free amount
• Stopping and restarting would lead to a lower
  annual payment
• Where a person is 60
• Stopping and restarting would lead to a lower
  annual payment

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Simplified contribution rules

• Age based deduction limits to be abolished
  replaced with a universal limit of 50 000
  regardless of employees age.
• Transitional arrangement, people who are aged 50
  and above at 1 July 2007 entitled to 100 000 per
  annum limit until 30 June 2012.
• Undeducted contributions will be limited to
  150 000 pa each from Budget night, 9 May 2006.
  Govt will allow averaging undeducted
  contributions over 3 years.

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Simplified contribution rules (cont)

• Self employed to receive full deductibility for
  contributions.
• Eligibility for the government co-contribution
  extended to self employed.
• Ability to make deductible super contributions to
  be extended to age 75.

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Maximum deductible conts
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16.5
(3)
(1)
15
(4)
48.5
(2)
15
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16.5
(2)
(1)
15
(3)
48.5
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(1)
15
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Value of deductible contribution

• CSS pension recipient of 50 000 p.a.
• Sells investment property and makes capital gain
  of 120 000
• As asset was held for more than 12 months, half
  the 120 000 (60 000) is added to assessable
  income.
• Tax due on gain is 22 400

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Value of deductible contribution

• If 60 000 of the proceeds are contributed to
  superannuation as a deductible contribution,
  contributions tax will be 15 of 60 000, or
  9000.
• The deduction cancels out the assessable gain,
  meaning no additional tax is payable
• As no tax on exit, funds can be withdrawn tax
  free whenever, total saving of 13 400

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Why stop there?

• The CSS pension of 50 000 is due for tax of 11
  100, less tax rebate of 5000 (10 of 50 000),
  making tax payable of 6100.
• If an extra 19 000 is contributed as a
  deductible contribution, the tax on the CSS
  pension falls by 5475 to 625, but the
  deductible contribution has only cost 15 of 19
  000, or 2850.
• Additional tax saving 2625.

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Getting money into superannuation

• For those under 65, no test
• For those 65-74 work test applies
• Must have been gainfully employed for at least 40
  hours in a period of no more than 30 consecutive
  days in the financial year that the contribution
  is made.

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Gainfully employed

• Means employed or self-employed for gain or
  reward in any business, trade, profession,
  vocation, calling, occupation or employment (SIS
  Regs 1.03)
• Gain or reward are not further defined, and
  hence have their ordinary meanings.

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Hagan V Ian Heraud Associates Pty Ltd and
others

• The Regs are not concerned with the amount of the
  gain nor with its quantification for any
  calculation or other purpose. It is sufficient in
  order to characterise a person as employed
  part-time or full-time that the person be simply
  gainfully employed.
• I am satisfied that a person who is employed for
  earnings of a non-monetary nature is a gainfully
  employed person.

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Re-contribution strategies

• Under new arrangements superannuation
  contributions can continue until age 75.
• Any excess funds from pensions can be contributed
  back to superannuation.
• No impediment in stopping AP and restarting with
  super balance.
• Additional tax benefits for claiming tax
  deductions and co-contributions.

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Re-contribution strategies

• Can continue to 75
• Can be the same pool of money contributed and
  subsequently withdrawn
• Can use excess funds from allocated pensions if
  need be.
• Means running dual strategies (APs and super
  funds) will make sense.

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Tax differential - 10 000 income
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What changes under the new rules?

• Allocated pensions become even more attractive.
• Earnings themselves remain tax free
• Income stream will be completely tax free
• Higher assets test will reduce the need for TAPs
• Re-contribution strategies more viable than ever.

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Things to do.

• Stay in super dont go to pension phase?
• If you dont need the income why not?
• Pension payments will be lower
• Pension environment tax free where super
  environment tax of 15 still applies
• Pension payments can be taken annually
• Pension payments can be re-contributed and back
  into super and then the AP with ease.

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So, the norm should be..
Super fund
Pension fund
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What do we need to be aware of until the change?

• As far as superannuation and deductible
  contributions are concerned go ahead like there
  is no tomorrow.
• Deductible contribution strategy for pension and
  other income particularly valuable in 2006/07
  financial year.
• No consequences if funds left for new
  arrangements.

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Getting around.

• The 150 000 limit from budget night on personal
  undeducted contributions
• 450 000 over three years/in one
• Spouse contributes which doubles the limit
• Does not include deductible contributions.

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Things to do.

• Superannuation splitting with spouse.
• Previously, three grounds why it would be done
• Balance tax
• One spouse at retirement earlier
• Balance the scales from an equity perspective
• First point no longer as relevant

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Things to do.

• Salary sacrifice into superannuation as much as
  possible
• All that we have to remember is that we restrict
  access to SOME of the money until age 60
• The lack of exit taxes make this a wonderful
  opportunity.

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Tax rates from 1/7/06
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Getting salary sacrifice right

• 55 yo taxpayer earns 120 000
• Net pay - 82 350
• Has employer sacrifice 95 000
• New gross pay 25 000
• New net pay 24 275
• Redraws 58 075 from mortgage equity
• A year later must repay 62 140
• Salary sacrifice (0 interest) 80 750
• Better off by 18 610

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Getting salary sacrifice right

• Combine TRAP pensions with salary sacrifice
• The TRAP will be able to provide a pension income
  of minimal tax, tax free if over 60 and 1/7/07
• This will allow a greater portion of income to be
  sacrificed.
• Use other post tax income to fund ss.

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Assets test taper rate reduction
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Asset test thresholds - homeowners
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All that glitters

• The income test still remains the big issue for
  Commonwealth pension recipients.
• Two couples (all 65) Couple A, have 50000 in
  CSS pensions, no assets, DSS 171 pf
• Couple B Draw 50 000 from an allocated pension
  of 500 000. DSS is 27 pf

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Under the new rules

• Couple A Commonwealth pension recipients, will
  continue to get 171 pf
• Couple B will now get 435 pf (up 408 pf)
• The reduction in the asset test is likely to
  produce any significant gain for those whose
  income comes from a Commonwealth pension

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Abolition of 50 assets test exemption for
complying pensions

• Complying pensions purchased on or after 20
  September 2007 no longer receive a 50 Assets
  Test exemption.
• Complying pension purchased prior to this date
  will continue to receive the relevant exemption
  as follows

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Superannuation death benefits

• All lump sum death benefit payments tax free, if
  paid to dependant (i.e. spouse, minor child,
  interdependent and financial dependant.
• If death benefit paid as a reversionary pension
  will depend on age of the primary and
  reversionary at the time of death.

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Tax on super death benefits
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Tax on super death benefits (cont)
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Tax on super death benefits (cont)
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Getting around.

• Lump sum tax to non-dependants on death
• Exempt component tax free
• Non exempt component tax free to low tax
  threshold (currently 135 590)
• Non exempt component taxed above low tax
  threshold
• Two strategies can minimise this

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Strategy one re-contributions
Non-exempt
135590
Exempt
16.5
31.5
Bank
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Strategy two Weekend at Bernies
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What if..

• A future Government changes the rules??
• One would suggest that it would politically
  courageous of a future Government to
  re-introduce exit taxes in the next 5-10 years.
• Any such introduction would invariably have
  transitional arrangements, such as those in 1983,
  1988, 1990, 1992 and 1994