Changes To Superannuation In Australia

Changes to superannuation over the past few years have simplified the system, made superannuation easier to understand, improve incentives to work and give you more flexibility.

Tax Free Benefits For People Aged 60 And Over

The most significant benefit is that it is now a tax haven for the current generation of retirees. For most people aged 60 and over, payment of a benefit as a lump sum or income stream (such as a pension) will be tax free.

However for some public service members their pension benefits will continue to be taxed but may enjoy a 10% tax offset on their regular income payments. Superannuation now comprises of only two components a tax free and a taxable component. The taxable component is called a concessional component.

Limits On Concessional Contributions To Superannuation

From 1 July 2007, tax deductions or concessional contributions made to superannuation will be subject to an annual cap of $50,000. Concessional contributions include employer contributions (including contributions made under a salary sacrifice arrangement) and personal contributions claimed as a tax deduction by a self-employed person.

The old age-based limits on deductions no longer apply. So apart from the transitional arrangements it is basically a level playing field. The trap is if you exceed the annual cap of $50,000 you will be taxed at a rate of 31.5%.

This is on top of the 15% tax paid by the superannuation fund. You can ask you superannuation fund to release money to pay this excess contributions tax. For those age 50 up to 30 June 2012, a transitional concessional contributions cap of $100,000 will apply.

Limits On Non-Concessional Contributions To Superannuation

A cap on after tax monies being contributed to superannuation or non-concessional contributions (NCC) of $150,000 per person per year will apply. Non-concessional contributions include personal contributions for which you do not claim an income tax deduction.

There will be a "bring-forward" option available, meaning that people under 65 years of age can make non-concessional contributions of up to $450,000 over a three-year period. You will be taxed on non-concessional contributions over the cap at the rate of 46.5%.

You will be required to ask your super fund to release an amount that is equal to the tax liability.

For The Self-Employed

If you are self-employed you may be able to claim a full tax deduction for your super contributions. You may also be eligible for the Super Co-contribution on contributions that you do not claim a deduction for.

Will The Concessional Contributions Cap Be Indexed?

Yes. Indexation of the $50,000 concessional contributions cap will be based on Average Weekly Ordinary Time Earnings (AWOTE), but will increase in $5,000 increments for simplicity. The cap of $100,000 that applies for those aged 50 or more will not be indexed.

Will Employers Still Be Able To Claim A Tax Deduction For Superannuation Contributions?

Employers will still be able to claim a tax deduction for contributions made on behalf of their employees. From 1 July 2007 there is no limit on the amount an employer can deduct as the age based limits on deductions for these contributions will no longer apply.

They will now be able to claim the deduction for employees who are under the age of 75 (increased from the previous age of 70).

Employers will only be able to claim a tax deduction for contributions made on behalf of employees aged 75 and over, if those contributions are required under an industrial award, determination or notional agreement preserving state awards.

I Am self employed. Will I Still Be Able To Claim A Tax Deduction For Superannuation Contributions?

Yes. From 1 July 2007 you will be able to claim a full tax deduction for superannuation contributions made until you turn 75 as long as you meet the eligibility criteria. The age based limits on deductions that currently exist for these contributions will no longer apply.

What Are Non-Concessional Contributions?

Most commonly, non-concessional contributions are the contributions you make for which a tax deduction is not claimed. Unlike employer contributions, the person who makes the contribution is generally not entitled to a tax deduction for that contribution. They are often referred to as undeducted or "after-tax" contributions. The contributions listed below are non-concessional contributions. They include, but are not limited to:

• personal contributions for which an income tax deduction is not claimed
• contributions a person"s spouse makes to their super fund account, and
• transfers from foreign superannuation funds (excluding amounts included in the fund"s assessable income).

How Will Superannuation Benefits Be Taxed From 1 July 2007?

For most people aged 60 or over who receive super benefits from a taxed source (this is most funds) that payment of a benefit as a lump sum, or income stream (such as a pension) will be tax-free.

I Am A Retired Public Servant. Will My Superannuation Pension Be Tax-Free?

No. The benefits of many retired public servants are paid from superannuation schemes that don"t pay tax or from a Government"s revenue. These sources are sometime called untaxed sources.

If your super benefit comes from an untaxed source, it will be taxed when you receive it regardless of your age.

However, if you are aged 60 or over when you receive a superannuation pension, you may be entitled to a 10% tax offset that will reduce the tax payable.

Will I Have To Lodge An Income Tax Return?

When you are 60 years or over, you don"t have to declare tax-free income paid from taxed sources of superannuation. If your only source of income is superannuation benefits from a taxed source you won"t need to lodge an income tax return.

You will have to lodge an income tax return if you have income from other sources, including from investments or untaxed superannuation sources, such as some public service super funds.

Is There A Minimum Or Maximum Amount I Have To Withdraw From Super Each Year?

Your fund may allow you to choose the amount of your superannuation income each year. Once you start a pension, a minimum amount is required to be paid as a benefit each year to ensure your capital is generally drawn down over time. There is no maximum amount other than the balance of your super account.

The following shows minimum annual pension for each age group:

Under age 65 is 4%
age 65-74 is 5%
age 75-79 is 6%
age 80-84 is 7%
age 85-89 is 9%
age 90-94 is 11%
age 95 or more is 14%

Do I Have To Cash Out My Super When I Reach A Certain Age?

No. The superannuation law will no longer require your benefit to be paid at a certain age. However, your payments are subject to the rules of your particular fund. The requirements for compulsory payment of benefits to members over age 65 who do not meet the work test, and compulsory payment from age 75 have been removed from the law.

What Is Happening To Reasonable Benefit Limits?

Reasonable benefit limits will be abolished from 1 July 2007. You will still need to include amounts exceeding your reasonable benefit limit as excessive amounts in your tax return for benefits received before 1 July 2007.

Do "Transition To Retirement" Measures Still Apply?

Since 1 July 2005 people at "preservation age" have been able to take their benefits as a non-commutable income stream while they are still working. The transition to retirement rules will be amended to include pensions meeting the new minimum standards.

From 1 July 2007 transition to retirement income streams will allow no more than 10% of the account balance (at the start of each year) to be withdrawn in any one year.

The existing non-commutability rules for income streams commenced under the transition to retirement measure will continue to apply. Income streams started before 1 July which comply with the transition to retirement rules at the time, will satisfy the new requirements.

When Can I Start Taking Out My Superannuation?

When you reach preservation age and retire, or turn 65, even if you have not retired from the workforce, you can access your superannuation. The "preservation age", however, will increase from 55 to 60 between the years 2015 and 2025.

What Are The Changes To The Assets Test Taper Rate For Age And Service Pensions?

The pension assets test taper rate will be halved from 20 September 2007 so that pension recipients will lose $1.50 per fortnight, (rather than $3 a fortnight), for every $1,000 of assets over the relevant threshold.

The assets test exemption for purchased complying income streams will be removed for income streams purchased on or after 20 September 2007.

Disclaimer:

This web site is not designed to provide personal financial or investment advice. The information provided is general in nature and does not take into account your particular investment objectives, financial situation or investment needs. We recommend that you speak to an xLife specialist financial Adviser before you make any decision regarding superannuation.
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