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Federal Budget 2006/07
Taxation
Superannuation
Social SecurityTechnically Advanced - Executive Summary
In what can only be described as a massive shake-up to the superannuation industry, Treasurer Peter Costello announced last night in the Federal Budget 2006 that from 1 July 2007 there will be no tax on superannuation lump sum or pension withdrawals for those age 60 (who have contributed to a taxed fund). He also announced that from 2007/08 onwards, RBLs will be abolished, deductible contributions will be allowed up to age 75, the compulsory cashing restrictions will be removed, and the age based deduction limits will be replaced with a universal $50,000 deductible contribution limit.
A long-standing battle for equal rights was won when Costello announced that self-employed contributions would be fully deductible, and the self-employed would also be eligible for the Government Co-contribution from 1 July 2007.
In another surprise, the Treasurer announced personal income tax cuts across the board - not just for high income earners, as was anticipated.
Despite the mainly good news, it was disappointing, from a financial planning perspective, to hear Treasurer Costello state that the proposed changes to super mean that those contemplating retirement from 1 July 2007 would not need professional tax advice relating to super. Arguably, this is the time when they need it most. The new regime creates arbitrage opportunities for transition to retirement planning between age 55 and 65, then from age 65 under the normal condition of release, by introducing several new tax strategies to people who couldn't previously access them. In any case, taxation is only one aspect of the value-add service provided by financial advisers to their clients.
The main proposed changes to taxation, superannation, and social secuity include:
- Taxation
- Superannuation
- Social Security
Personal Income Tax - cuts across the board
Senior Australian Tax Offset (SATO) and Low Income Earners Tax Offset
Medicare Levy changes
Small business CGT concessions extended
Family Tax Benefit changes
Fringe Benefits Tax reduction
No tax on lump sums or pensions over age 60
Reasonable benefit limits abolished
Age based deduction limits replaced with universal contribution limit
Personal undeducted contribution limits
Self-employed eligible for 100% deduction and Government co-contribution
Compulsory cashing restrictions removed
Deductible contributions allowed up to age 75
Consolidation of super accounts by the ATO
Age Pension asset test rate reduction changes
Carer Bonus
Utilities allowance - one off payment
Large family supplement
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Personal income tax - cuts across the board
The Government will provide further tax cuts to those announced in the last two Federal Budgets. In a surprise move, there were tax cuts across the board which will come into effect on 1 July 2006. The changes include:
According to Treasury, the tax cuts will increase disposable income for all Australians, provide further incentives for individuals to participate in the workforce and improve the international competitiveness of Australia's tax system.
SATO and Low Income Earners Tax Offset changes
Under proposed changes to the Senior Australians Tax Offset (SATO), those eligible will pay no tax on annual income levels up to $24,867 for singles and $41,360 for couples.
For low-income earners, the Low Income Tax Offset will increase from $235 to $600 and will phase out from $25,000 to $40,000. The proposed changes mean a low-income earner will not pay tax until their annual income exceeds $10,000.
Medicare Levy - threshold changes
From the current financial year, the Medicare levy low-income threshold will increase to $16,284 for individuals and $27,478 for families. The additional amount of threshold for each dependant child or student will also be increased to $2,523.
The Medicare Levy threshold for pensioners below pension age will also be increased. From 1 July 2005, the threshold will rise to $19,583. This will ensure that pensioners below pension age do not pay the Medicare levy while they do not have an income tax liability.
Small business CGT concessions extended
The Government has proposed to improve the operation of the small business CGT concessions by making the following changes:
The Government will relax the income test for Family Tax Benefit Part A (FTB (A)). From 1 July 2006, the amount that a family can earn each year before their FTB (A) is reduced will be increased to $40,000 - extending the increase announced in last year's Budget by a further $2,500 (from $37,500).
Once the income of families with dependent children exceeds the maximum threshold, FTB (A) reduces from the maximum rate at a rate of 20 cents for every extra dollar of income, until the base rate of payment is reached. Treasury expects that this measure will increase the amount of FTB (A) received by over 480,000 families.
Fringe Benefits Tax reduced from 48.5% to 46.5%
The fringe benefits tax rate will be reduced from 48.5% to 46.5%, effective from 1 April 2006.
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No tax on super lump sums & pensions over age 60
Under the proposal to radically simplify the superannuation system, there will be no tax on superannuation benefits withdrawn on or after age 60, either by lump sum, income stream, or a combination of both from 1 July 2007. A person aged less than 60 would still be taxed on their benefits, but under streamlined arrangements.
Table 1: Comparison of lump sum ETP and pension tax pre and post 1 July 2007|
Lump sum ETP withdrawal |
Up to 30 June 2007 |
From 1 July 2007 onwards |
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Post 30 June 1983 component
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Tax-free up to low Post June 1983 threshold: and 16.5% up to RBL
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Nil
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Pre 1 July 1983 component
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5% included as assessable income and taxed at marginal tax rate
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Nil
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Undeducted component
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Nil
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Nil
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Concessional component
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5% included in assessable income and taxed at marginal tax rate
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Nil
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Post June 1994 Invalidity component
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Component of ETP relating to payment in consequence of an employee's physical or mental capacity after 1 July 1994
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Nil
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CGT Exempt component
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Nil
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Nil
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Excessive component
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Excessive amount that represents a taxed post June 1983 component - taxed at 38% plus Medicare. All other amounts - taxed at 47% plus Medicare
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Nil
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Superannuation pension or annuity
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Non-excessive pension:Allowed up to 15% pension or annuity tax offset and taxed at marginal tax rates
Excessive pension:Taxed at marginal tax rates |
Nil
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Reasonable Benefit Limits abolished
Under the Budget proposals, the Government plans to abolish reasonable benefit limits, which has huge ramifications.
Firstly, it will certainly encourage high-net-worth investors to contribute to superannuation. With excessive benefits tax disappearing along with the RBLs, more and more people will shelter assets and income within superannuation - especially considering that both pension income or commuted amounts will be tax free from age 60.
It also effectively means that Term Allocated Pensions will become obsolete. The only reason you would invest in a Term Allocated Pension over an Allocated Pension is to access the pension RBL. Social Security clients looking to access the 50% asset test exemption allowed by complying pensions generally opt for the more consistent income generated by lifetime or life expectancy based pensions.
Aged-based deduction limits replaced with universal contribution limit
Under the proposed changes, from 1 July 2007 deductible contributions will be limited to $50,000 p.a. irrespective of age. Currently, contributions are subject to age-based limits. The following table highlights the changes to the contribution limits from 1 July 2007:
Table 2: Comparison of deduction limits pre and post 1 July 2007
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Age |
Up to and including 2006/07 |
From 2007/08 onwards |
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<35 years
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$14,603
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$50,000
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35 to 49 years
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$40,560
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$50,000
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50 to 69 years
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$100,587
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$50,000
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70 to 75 years
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-
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$50,000
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Personal undeducted contribution limits
The Government have also proposed that personal post-tax contributions would be capped at $150,000 a year in order to ensure that super is not used to protect large amounts of money in a concessionally-taxed environment. The Government has suggested that it will consider averaging post-tax contributions over three years in order to allow for larger one-off payments - which would effectively allow a personal contribution of up to $450,000 every three years.
Self-employed finally find redemption
The self-employed have been historically disadvantaged because they have never been able to claim a full deduction for personal contributions to superannuation. Those making personal contributions as a self-employed or eligible person (where less than 10% of total assessable income comes from employment) are currently only entitled to a deduction for the first $5,000 and 75% thereafter. Under the Government's proposal, all superannuation contributions made by the self-employed would be 100% deductible.
The changes also allow a self-employed person to qualify for the Government co-contribution for any post income-tax personal contribution to superannuation.Compulsory cashing restrictions removed
Currently benefits in a regulated superannuation fund must generally be cashed or rolled over to cash as soon as practicable after:
However, under the proposed changes, a person will no longer be forced to draw down their superannuation benefits after reaching a certain age. Keeping benefits in superannuation longer than necessary will be detrimental to a client's total benefits because it means that whilst in the accumulation phase of superannuation the member is not taking advantage of tax-free earnings and capital gains available in pension phase.
Deductible contributions up to age 75
In another incentive to increased workforce participation the Government have proposed that deductible superannuation contributions be allowed up to age 75.
In a bold move to rid the ATO of managing a lost member registry, the Government have proposed that a person can provide the ATO with a simple standard form with which to arrange the consolidation of that person's super benefits from their different accounts. Superannuation fund trustees would have up to 30 days (as opposed to the current 90 days) to satisfy the request to transfer.
Appropriate use of pre 1 July 1988 funding credits
The Government has proposed a measure be introduced to remove the anomaly that has allowed some public sector superannuation schemes inappropriately applying funding credits to reduce tax on contributions made to fund benefits after 1 July 1988.
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Age Pension - asset test rate reduction change
The Government has proposed the Age Pension assets test rate of reduction over the lower assets threshold be reduced from $3.00 to $1.50 per fortnight with effect from 20 September 2007. A pensioner's home would remain outside the assets test. This would allow a single retiree homeowner to have around an additional $165,000 of assets before losing the Age pension, while a couple could have around $275,000 of additional assets before losing the Age pension.
One off payment - Utilities Allowance
Under this proposal, the Government would allow an additional one-off payment by 30 June 2006 equal to the maximum rate of Utilities Allowance ($102.80) to each household with a person of Age Pension or Service Pension age eligible for Utilities Allowance on 9 May 2006. A $102.80 payment will also be provided by 30 June 2006 to each self-funded retiree eligible for the Seniors Concession Allowance on 9 May 2006.
Carers - payment of one-off carer bonus
The Government has proposed that Carer Payment recipients are to receive $1,000 and recipients of Carer Allowance are to receive $600 for each eligible person in their care. Those eligible for both payments on Budget night 2006 will receive both lump sum payments. In addition, those eligible for both the Carer Allowance and either the Wife Pension or Department of Veterans' Affairs Partner Service Pension on Budget night 2006 will receive both bonus payments.
The Large Family Supplement of $248 a year will be extended to eligible families with 3 children from 1 July 2006.
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This information is of a general nature only and should not be relied upon, as it has been prepared without taking into account the objectives, financial situation or needs of any particular person. It is not intended to constitute investment, legal or taxation advice and should not be considered or relied upon as a comprehensive statement on any such matter. Before acting on the information, a person should consider its appropriateness, having regard to their objectives, financial situation and needs. Advance has endeavoured to ensure that the information contained in this communication is accurate, but to the maximum extent permitted by the law, disclaims all liability for errors or omissions.
Source: Budget Paper, Treasurer's Press Release, 9 May, 2006.