New Superannuation rules at a glance From 1 July 2007:
|
Some details and implications
Transition to retirement for under 65s
Persons wishing to access retirement benefits before age 65 who do not meet the current definition of retirement will need to consider a transition to retirement pension.
Whilst pension payments will be taxed prior to age 60, pension payments for persons aged 60 and above will be tax free. This, combined with deductible contributions, may offer the opportunity to make tax deductible contributions and receive tax free income at the same time.
The main difference between lump sum and pension payments will be the treatment of the account balance that is not applied to a pension. Tax will be paid on earnings not applied to a pension. Account balances applied to the pension phase will continue to be tax free.
The Social Security rules are to be modified to allow a greater asset test. However, the concession applying to complying pensions will cease to apply from 20 September 2007.
Complying pensions
A complying pension such as a term allocated pension entered into prior to this date will continue to be subject to the old Social Security asset test rules.
It is not clear if a person can opt out of a complying pension once the new rules commence. Logically there is no reason why they could not opt out, except where there are Social Security implications. Likewise there is a strong argument for choice. However, once the residual value of the pension falls below the assets test, then the pensioner will want to opt out, so there will be some further policy matters to be considered.
Eligible termination payments
The eligible termination payment rules are to be altered. Eligible termination payments at the concessional rate (equivalent to current superannuation concessional rates) are to be limited to a maximum of $140,000. It is a per employer limit. Roll over to super is not allowed.
Contribution splitting
Contribution splitting will be irrelevant for most people, although couples who wish to access two low rate ETPs prior to age 60 may still be attracted to this option. Contribution splitting also allows the acceleration of access to pension entitlements and low rate ETP’s where there is a significant age gap between spouses and the recipient wishes to transfer to an older spouse who is eligible to receive such co-contributions.
Tax treatment
The pre-1983 concessional undeducteds, post-1984 invalidity, capital gains tax exempt will all become a new tax exempt component.
The general tax rates for taxable amounts will not change, that is to say, 20% for under age 55, 0% for the first $129,751 and thereafter 15% when aged 55 to 59, 0% when aged 60 and over. Death benefits Death benefits appear largely unchanged.
No compulsory withdrawal
There will no longer be any compulsory withdrawal of benefits.
Lifetime pensions
Lifetime pensions will become redundant, other than possibly for Social Security rules. Existing pensions will be subject to transitional rules. For some pensioners, there is still a need for income over the whole of the pensioner’s actual life. It is not clear what incentives are to be offered. As earnings on assets applied to a transition to retirement pension are exempt from tax, there are some interesting issues if there is no minimum withdrawal requirements as proposed.
Co-contributions for self-employed
The co-contribution scheme is to be extended to the self-employed.
Portability
Portability is to be further streamlined. The maximum time limit is to be reduced from 90 days to 30 days. A standard portability form is to be introduced. If implemented successfully, the current liability issues that a trustee faces of having to be satisfied that the member is aware that they can ask for information for the purpose of understanding any benefit entitlements before the transfer is made is removed. If so, this will simplify and speed up the process. If this obligation is not removed there is potentially a greater trustee liability than there is now. It is not clear what is to happen to the $5,000 minimum amount where an interest is retained in the fund. Will this be further modified or will the current issues as to when an amount can be retained simply be aggravated?
Conclusion
There are significant issues raised by the proposal and as time goes on more issues will be identified. The original proposal will not be the simple change that is suggested in the Budget.
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.