Federal Government Plan

The Federal Treasurer, when delivering the 2006 Federal Budget, stunned Australia by announcing a bold “plan to simplify and streamline superannuation”.

The major components are described below:

Taxation of Benefit Payments

• tax free benefits for those over age 60 (that is, no tax when benefits are paid);

• superannuation preservation rules would not change.

• reasonable benefit limits (RBLs) would be abolished.

Payment Rules Simplified

In summary, individuals would be given more flexibility over how much of their

superannuation they take and when they take it. To be more specific:

• the rules for when individuals can voluntarily choose to access their

superannuation would not change

• pensions would continue to receive favourable tax treatment

• individuals would not be forced to take their benefits at particular ages

• the rules governing the acceptable amounts of pension payments per year and the type of allowable pension products would be simplified

• new minimum standards for all pensions would be developed setting simpler basic restrictions such as a minimum amount of payment

• the preservation age will not be changed.

Simplified Contribution Rules - Key Points

• under the plan, age-based deduction limits would be abolished. Instead, deductible contributions will be capped at $ 50,000 pa

- A transitional period would apply for people who are aged 50 and above to

allow those planning to retire soon to make larger contributions

• employers would receive a full deduction for all superannuation contributions they make for employees up to age 75

• the self-employed (and other persons able to claim deductions for contributions

to superannuation) would be able to claim a full deduction for contributions to

superannuation until age 75

• undeducted contributions would be limited to $150,000 in a year. The Government will consider whether the cap should be averaged over three years to allow people to accommodate larger one-off payments

• government co-contribution will continue to be paid for eligible persons (now

including the eligible self-employed) on incomes up to the co-contribution

upper threshold, and no tax is payable on the co-contribution.

Post Budget date points:

1. This “plan” is proposed and will not be implemented in this current financial year. Please note the one exception is the limit on undeducted contributions (of $ 150,000 p.a.) which is in force from 9 May 2006 .
2. The Treasurer was quoted on 11 May 2006 as having:
• pledged that “many Australians who had already drawn down their superannuation savings would still gain the benefits of his plan to scrap taxes on super payouts”
• “federal government would consider transitional measures to ensure a person in their 50’s who had planned to make large contributions …. would not be disadvantaged…”
• “people who took their super as a lump sum would still be taxed until the starting date”
• “the planned scrapping of the exit tax for people over 60 would be extended to people who retired before the scheduled starting date on 1 July 2007 , and took a private pension”. This is a good move for those now moving toward pension stage in the interim period.
3. Further announcements, from the Treasurer, on 13 June 2006 include:
• undeducted contributions would be subject to a three – year averaging provision of $ 450,000
• compulsory cashing rules will be abolished from 10 May 2006 . This will allow people over 65 to retain their benefits in super indefinitely.

Author: Merv Lobb (ca acis acim), Director, SuperAnswers Pty Ltd. Merv has a critical knowledge of the Self Managed Superannuation industry and is recognised as a specialist. SuperAnswers provides specialised and integrated services to SMSFs.

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