Super Scramble

Treasury officials and superannuation industry leaders meet today to discuss transitional arrangements relating to last week's budget changes. At the top of the agenda will be the Government's controversial decisions to limit the dollar amount of deductible contributions to $50,000 a year, and a new $150,000 per year limit on “lump sum” personal contributions.

This meeting is welcome news and it is crucial that the Government puts some sensible transitional rules into place quickly.

Before the budget announcement, there had been no restriction on the amount of undeducted contributions that could be made and months or even years of planning has been thrown into chaos for people who have recently retired or who are retiring in the near future.

Public consultation will almost certainly lead to the proposals being amended, and the devil is in the detail of the legislation.

In fact, the budget changes do soften the effect of the dollar limits on contributions by allowing '” for the five years to 2012 '” $100,000 a year of deductible contributions to be made into superannuation for people aged over 50.

However, there are still several areas of contention that may take weeks to sort out. The wrangle over the specifics of the reformed superannuation rules is of urgent relevance to anyone about to retire or about to take a redundancy package.

For example, people in the middle of a re-contribution strategy can’t make their planned re-contribution of undeducted contributions if they exceed $150,000. In the same way, people who are realising assets, such as selling property held in their own name and who planned to contribute the proceeds to their superannuation fund, have been left in limbo.

Eureka Report readers have been perplexed by several aspects of the budget changes. This week I have taken two letters from readers concerning the budget, and three letters of wider concern that cover ongoing issues in superannuation.

Before dealing with readers’ concerns I want to remind you of the key changes announced in the budget.

From July 1, 2007, people aged 60 or over will receive lump sums tax-free if they are paid from a taxed superannuation fund, which includes a self-managed superannuation fund. Lump sums will not need to be reported in the individual’s tax return, thus reducing taxable income. Pension income will also be tax-free for people aged 60 and over, including those that commenced before July 1, 2007.

Trustees will not need to report benefit payments for RBL purposes, thus removing some of the compliance burden. This looks too good to be true, so here’s the catch: under current rules rebateable pensions receive a 15% rebate on each dollar of taxable income, and any unused rebate can be offset against other tax payable, but from July 1, 2007, where the income is tax free, there will be no excess rebate.

Age-based limits relating to tax-deductible superannuation contributions will be abolished, and employers and self-employed individuals will be able to claim a full deduction for superannuation contributions they make until the recipient reaches the age of 75.

Reasonable benefit limits (RBLs) will be abolished.

People will no longer be forced to take their superannuation benefits at a particular age such as at 75, or at 65 if they do not meet a work test, thus giving them greater flexibility as to how and when to draw down their superannuation in retirement. This will enable people to take benefits in the form of an income stream, lump sum or to just draw benefits out of the fund as they want to.

The rules that apply to the amount of pension payments per year and type of allowable pension products will be simplified, with simpler new minimum standards and basic restrictions applying including a minimum amount of payment to be made at least annually. No maximum will apply and therefore the whole amount can be taken except in the case of pensions commenced under the transition-to-retirement rules.

Provided a pension meets the new minimum standards, earnings on assets supporting that pension will be exempt from income tax.

Self-employed individuals can be eligible for the Government co-contribution scheme for their personal post-tax contributions on the basis of an adjusted income test.

Employer lump sums (eligible termination payments or ETPs) will be capped and will not be able to be rolled over into superannuation. The post-June 1983 component will be taxed at 15% on amounts up to $140,000 for people aged 55 and over and at 30% for those aged under 55. Amounts over $140,000 will be taxed at the top marginal tax rate.

Benefits paid before age 60 will be taxed in a similar way to current arrangements and will still be required to report details of lump sums (ETPs) and pensions in their tax return. However, the number of components will be reduced to two:

1: an exempt component comprising the pre-July 1983 component (which will be calculated at a particular date and become a fixed component in the future and form part of the undeducted purchase price of a pension that commences on or after July 1, 2007), CGT exempt component, post-June 1994 component, concessional component and undeducted contributions; and

2. a taxed component comprising the post-June 1983 component, which will be taxed in the same way as currently, applies depending on whether the person is aged 55–59 or under age 55; and non-qualifying component.

As any amendments or deletions occur in the budget's proposed changes to superannuation Eureka Report will bring you up to speed in the coming days.

BUSINESS SALE

I retired at 67 last month, having worked all my life running my own business. I only had $152,000 in super because of the demands of running stock and debtors in the business. I've since sold the business for $750,000 and sold a small investment property for $250,000 net of debt.

With the big changes to super I'm not sure what I'll do now, but I was wondering: will the proceeds of my business sale qualify under the CGT small-business concessions and, if so, are you saying that even this would have had to have been entered into prior to budget night to be accepted by the tax office?

Only the part that is a capital gain would qualify. As the amount was from sale of stock and trade creditors, the small-business concessions don't apply as it is ordinary income.

If it did qualify under the CGT small-business concessions there would not be a problem as this is still available.

For example a person sells their business premises for $700,000 and makes a capital gain of $200,000. Only the $200,000 can be treated as a CGT exempt component

As for the second part of your question, no, it did not need to be entered into prior to budget night to be accepted by the tax office. It can be accepted later.

WORDING WORRY

The new super changes appear to be fantastic for me but I am just concerned about some of the wording. Pensions taken from a taxed fund will be tax-free. Does this mean that the fund, which paid no taxes on earnings once it reached the pension stage under the old system, will now be taxed under the proposed system? If so, it is not such a windfall after all.

There is nothing in the announcement that affects the current tax exempt status of superannuation pension assets. However, it is important to realise that there will almost certainly be some changes to a budget announcement following public consultation and the devil will be in the detail of the legislation

TRANSFERRING SHARES

I have $250,000 in CSL shares purchased for $15,000 in my own name. How can I transfer these to my DIY super fund (my wife and I) and avoid CGT?

If you have any other listed securities that are currently showing a capital loss (the most common being Telstra 2) you could sell them or transfer these to your DIY fund and offset the loss against the gain, then you would be eligible for a 50% discount on the balance.

To reduce the impact of CGT further, if you are aged at least 50 and you receive less than 10% of your income plus reportable fringe benefits from an employer you may be able to claim a personal deduction for superannuation contributions of up to $100,587 that can be claimed against your income, including the discounted the gain. As there is a substantial amount of tax involved in the proposed transfer you need to get advice from a tax expert in order to get a tailored solution to best suit your particular circumstances.

ALLOCATED PENSION

For the past three years I have been drawing an allocated pension from three retail funds. Is it possible to change funds once you start an allocated pension?

Provided the contract you entered into when you purchased your allocated pension permits it, you can change the provider of your allocated pension by rolling over your existing superannuation benefits into another allocated pension provided by another fund. You need to consider several issues before doing so because there may be RBL or other consequences.

A commutation (conversion to a lump sum) will occur at the point of rollover and the value of the benefit less any fees will be reported for RBL purposes and reduce the amount of the original reported amount based on a discounted cash flow-type calculation. The new fund will then report the account balance in respect of the new allocated pension and the RBL counted amount will include any growth in the fund. In addition both the undeducted purchase price and annual deductible amount are recalculated at that time.

There may be fees and charges from both the original and the new fund that you would not otherwise have incurred.

In view of the announced changes in the budget, it may be worthwhile delaying any decision to change funds until more detail is known about new and more flexible products, especially if you may have an RBL problem.

PRE AND POST 1983

I have about 16 years of pre-1983 service. I understand that if I make a large undeducted contribution to my account in my DIY super fund, then the proportion that is pre-1983 will increase and the post-July 1983 component will decrease. I have three questions:

1: Is this correct?

It can be. If you withdraw the undeducted contributions at the same time as pre and post components. The pre-July 1983 component of the eligible termination payment (ETP) less undeducted contributions must be $0 or more.

It is important for you to be aware that the 2006-07 budget proposal places a cap of $150,000 a year on the amount of post-tax superannuation contributions a person can make (although it has said it will consider whether the cap should be averaged over three years to allow people to accommodate larger one-off payments). If the proposed plan was implemented, this would apply from budget night May 9, 2006.

2. If so, what is the formula for calculating the new pre and post 1983 amounts?

If these are the only components of an ETP the formula to calculate the pre-July 1983 component is the lesser of:

ETP multiplied by (pre-July 1983 days in eligible service period divided by the total eligible service period)

and

ETP minus undeducted contributions

3. If so, what then happens to the new pre and post 1983 amounts if in future I make a transfer of 85% of my prior year's contributions to my wife's super account in our DIY fund?

The transfer to your spouse is irrelevant. The pre and post-1983 amounts change every day and the actual amounts are only relevant when they are withdrawn together with undeducted contributions.