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Tax Laws Amendment (Superannuation Contributions Splitting) Bill 2005 has now received Royal Assent. Draft SIS and RSA Regulations were released on 23 November 2005 to support this Act. The changes allow a member's previous financial year employer and personal contributions to be split with a spouse - applying to contributions made on or after 1 January 2006.

What amount of a contribution can be split?

The new changes allow a split of up to 85% of the member's previous financial years deductible contribution; and up to 100% of the member's previous financial years undeducted contribution to be split with a spouse. Super contribution splitting applies only to contributions made on or after 1 January 2006.

What happens if a member rolls to another fund during a year?

Only those contributions contributed during the previous financial year in a member's current super fund may be split to the spouse. This may be detrimental to those wanting to split super contributions to a spouse, but who have rolled over their benefit to another fund toward the end of a financial year.

What must a splitting application include?

• A statement that the spouse is aged between 55 and 65 and does not consider themselves permantly retired, or that they are under 55.
• The amount of the member's deductible and undeducted contributions the member wishes to split to their spouse.

Can a member split to a spouse who has satisfied a condition of release?

• Aged 65; or
• Is between 55 and 65 years of age and has permanently retired.

The problem is that "permanently retired" has not been defined. Technically Advanced are assuming that it is supposed to have the same meaning as "no longer gainfully employed" as is the case for the super condition of release where a person has reached preservation age. If not it may mean a member could split to a spouse who is temporarily retired. However, this point is likely to be clarified when the final Regulations are released.

How long does a super fund trustee have to process a splitting application?

Assuming the application to split contributions to a spouse is accepted by the trustee and the fund actually allows for the splitting of super contribution between spouses to occur (this not mandatory), the trustee has 90 days after receiving the application to rollover, transfer or allot the amount to the receiving spouse's superannuation account.

How can I maximise a split to a spouse to alleviate an RBL position?

For details, please contact your State's Advance Sales Representative.

The abolition of the superannuation contributions surcharge opens the door for both high and low-income earners over the age of 55 and still working* to benefit from the Advance transition to retirement strategy.

Before surcharge was officially abolished on 12 August 2005 (applying to contributions made on or after 1 July 2005) the strategy mainly provided an increase in retirement benefits for those who were already in surcharge territory (i.e. their adjusted taxable income was over the surcharge thresholds).

This is because investors with adjusted taxable income below the surcharge thresholds would only ever pay 15% tax on contributions to superannuation. By drawing a non-commutable income stream and salary sacrificing back to superannuation their adjusted taxable income would increase, which meant they may have had to pay surcharge on all contributions to superannuation (i.e. 25% for 2005/06 before the abolition of surcharge).

With surcharge now abolished the level of adjusted taxable income becomes irrelevant. This means deductible contributions to superannuation from 1 July 2005 are taxed at a maximum 15%. The effect of the abolition of surcharge on increasing benefits in retirement through implementing the Advance transition to retirement strategy can be highlighted in the following case study - which also featured in last weekend's Weekend Australian newspaper.

Note: Adjusted Taxable Income (ATI) generally included the following:

• Taxable income plus 'other income';
• Surchargeable contributions (eg. employer superannuation contributions, superannuation guarantee (SG) shortfall amounts, employer ETP's); and
• Total reportable fringe benefits.

Case Study - Effect of surcharge on transition to retirement

George is 55 and will earn $75,000 in taxable salary income for 2005/06. He commences a non-commutable allocated pension for $550,000 and draws the maximum gross pension income of $57,290. To maintain his current net income of $54,372 (i.e. on $75,000 gross) he can salary sacrifice about 97% or $72,808 back to superannuation. If surcharge was not abolished for 2005/06 and future financial years the increase in retirement benefits George would have from implementing the transition to retirement strategy would be $5,329 or 0.6%. However, with surcharge abolished for contributions made on or after 1 July 2005 implementing the same strategy yields an increase in retirement benefits over the ten-year period from 55 to 65 of $93,396 or 9.92%.

This means the abolition of surcharge has increased George's benefits at retirement implementing the Advance transition to retirement strategy by $88,067.

The following assumptions have been made when creating the model for this case study:

• Salary, benefit levels have been indexed
• Real rates of return have been used - 85% for accumulation phase and 100% for pension phase
• Nominal rate of return of 8% used
• Inflation or indexation rate of 2.5% used
• Where surcharge applied - contributions tax rate increases from 15% to 25%
• Net income levels have been maintained unless denoted by ^ where extra income has been taken due to age based deductible contribution limit being reached
• Post 30 June 1983 component only - no deductible amount used
• Maximum pension has been drawn unless capped by net income requirement
• Tax scales for 2005/06 used for Year 1
• Tax scales for 2006/07 used for Year 2 and beyond
• Effective salary sacrifice arrangement in place and remuneration benefits are packaged(i.e. total employment cost used - SG paid on full salary despite amount salary sacrificed).

* Those currently receiving Social Security benefits may reduce or lose those benefits as a result of implementing the Advance transition to retirement strategy as superannuation is exempt from the assets test until age pension age but commencing a non-commutable pension will be fully assessable and a complying pension will be 50% exempt.

For further information on Advance's transition to retirement strategy contact your Advance BDM.

Superannuation Laws Amendment (Abolition of Surcharge) Bill 2005 passed the Senate on 10 August 2005 and awaits Royal Assent. Surcharge will not be payable on contributions to superannuation or on employer termination payments cashed-out made on or after 1 July 2005. This certainly encourages high-income earners, previously deterred by the additional surcharge tax, to make salary sacrifice and other additional deductible contributions to superannuation. This is because deductible contributions (including Superannuation Guarantee and salary sacrificed contributions) will now only be taxed at the maximum contributions tax rate of 15%, regardless of income level. Financial advisers will attest that the superannuation contributions tax surcharge has been a major stumbling block in encouraging additional contributions to superannuation for high-income earners.

The passing of this Bill through the Senate provides needed clarity for financial advisers. Since 1 July 2005, many financial advisers have been unsure of whether to maximise client salary sacrifice arrangements - as this decision largely depended on the abolition of surcharge.

It has been mooted by some groups that surcharge has not been abolished but rather the maximum rate of surcharge has been dialled down to 0%. This hysteria stems from the fact that the surcharge legislation was not repealed. Doomsdayers will have you believe the Government has done this to leave the door open for it to be reintroduced in the future. This notion is completely false and misleading - at least in the short term. The surcharge legislation needs to remain in force to allow the Commissioner of Taxation to continue to issue assessments for 2004/05 and previous financial years and to collect outstanding surcharge liabilities.

The Government has announced that superannuation contributions may be split between spouses for contributions made on or after 1 July 2006.

Importantly, the proposal is voluntary for superannuation funds meaning a superannuation fund does not have to accept a request to split super contributions between spouses.

• Reasonable Benefit Limits (RBLs); and
• Tax-free low post June 1983 thresholds ($123,808 for 2004/05).

The proposal to split superannuation contributions between spouses is not a new one. In fact, Taxation Laws Amendment (Superannuation Contributions Splitting) Bill 2003 was before the Senate noticeboard just prior to the last Federal election but lapsed when parliament was prorogued.

The Regulations was to allow a member of a regulated superannuation fund to split their previous year's contribution with their spouse where:

• The total post-June 1983 component is an amount that does not exceed 60% of the taxpayer's previous financial year's deductible contributions.
• The level of undeducted contributions allowed in the ETP is 100%.

Note: Assuming the same model is adopted for this new Budget proposal, the benefits can be highlighted through the following case study, which also adds the benefits of the abolition of surcharge (was to be 10% from 1 July 2005).

Download and print the combined effect of superannuation contribution splitting between spouses and the abolition of surcharge case study

The Government has amended the Portability Regulations with the introduction of Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 3). The amendment has the effect of removing the requirement under the Portability Regulations for an account to be 'inactive' before it can be rolled over or transferred to another fund.

Effects of removing the inactive account restriction

Removing the six month inactive account restriction was intended to provide cohesion to the Choice regime commencing 1 July 2005 by allowing contributions and benefits to be consolidated. Under Choice an employee can choose the future direction of compulsory employer contributions. Portability allows the employee's current benefit to be transferred to the new 'chosen' fund.

However, in many respects Portability is more powerful than Choice. It has consolidation advantages for employees who will be offered Choice from 1 July 2005, but also provides a form of choice for some employees who will not be offered Choice (e.g. employees covered under an industrial award or Australian Workplace Agreement). These employees can transfer their current benefit to a fund of their choice, and then every 12 months transfer the balance of employer contributions (paid into their employer-sponsored fund) into their chosen fund. (Refer to article in The Bulletin)

New Portability rules - summary

Portability allow a member of a regulated superannuation fund or ADF to consolidate employer-sponsored superannuation accounts.

The Portability rules are outlined under Division 6.5 of the SIS Regulations and apply to complying superannuation funds, allocated pensions and ADFs. There are some funds excluded from Portability. These include:

• Self-managed superannuation funds (SMSFs);
• Funds in pension phase (apart from allocated pensions);
• Unfunded public sector superannuation schemes (defined in Schedule 1 of the Superannuation Contributions Tax (Assessment and Collection) Regulations 1997); and
• A defined benefit component of a defined benefit fund where the member is still an employee of the employer-sponsor.

Under Portability a trustee is required to transfer or roll over the amount as soon as practicable and within 90 days of receiving the member's request.

The trustee of the superannuation trustee may refuse to accept a request to rollover a benefit from a member in the following circumstances:

• Receiving fund will not accept the transfer or roll over;
• Less than $5,000 will remain in the account following a partial transfer; and
• The amount has been transferred or rolled over within the last 12 months.

The Government has announced that transitional relief for members of SMSFs and other small funds wishing to commence defined benefit pensions will now be extended to 31 December 2005. This was previously due to end on 30 June 2005.

Superannuation integrity measures announced on 11 May 2004 in the 2004/05 Federal Budget were introduced to prevent funds with less than 50 members from providing defined benefit pensions (e.g. lifetime and life expectancy based pensions). The integrity measures were predominantly intended to prevent SMSFs and other small funds from accessing some significant RBL and estate planning advantages of funding lifetime and life expectancy based pensions. The integrity measures effectively allow only allocated and term allocated pensions to be funded through a SMSF at the end of the transitional period.

The review into the provision of pensions by small funds was to be submitted to the Government by Treasury and the Australian Government Actuary by April 2005 following consultation with the financial services industry. The Government has announced that it is still considering the outcome of the review following the finalisation of the consultation process. Minister for Revenue and Assistant Treasurer, Senator Mal Brough has said the extension "will give retirees greater certainty about the range of income stream options available to them while the Government considers its response".