The Federal Government managed to surprise the superannuation industry with enhancements to its co-contributions regime plus a tightening of arrangements aimed directly at tax avoidance in the self-managed super funds arena.
The headline super initiative announced by the Treasurer, Peter Costello, in his Budget speech was the expansion of the super co-contribution arrangements further up the income scale to effectively take in lower-middle income earners.
However, the real surprise was the promise to reduce the superannuation surcharge.
The Government says it will increase the incentive for low to middle income Australians to make additional voluntary savings and that from 2004-05, the maximum Government co-contribution will be increased from $1,000 to $1,500, to match a $1,000 personal contribution.
It says the maximum Government co-contribution of $1,500 will be available to all people making personal contributions on incomes up to $28,000. The income threshold was previously $27,500. Above this amount, the maximum co-contribution will reduce by 5 cents for each dollar of income to phase out completely at $58,000, up from $40,000.
The Government will further reduce the superannuation surcharge rate, leading to a maximum rate of 7.5 per cent for 2006-07 and following years.
The main points contained in the Budget papers were:
n The Government will allow people who have not retired to access their super as a non-commutable income stream once they reach their preservation age, with effect from July 1, 2005.
Currently, a person below the age of 65 must retire or leave employment before they can access their superannuation benefits. This rule may lead to people retiring prematurely in order to access their super. Allowing people to access their super as a non-commutable income stream on reaching preservation age will provide them with increased flexibility in the transition to retirement.
n The Government will require all employer eligible termination payments (ETPs) that are rolled over into a super fund on or after July 1, 2004 to be preserved.
Currently, the general rule requiring superannuation contributions to be preserved until retirement does not apply to employer ETPs that have been rolled over into a super fund.
Requiring these amounts to be preserved will ensure they are treated consistently with other amounts contributed to superannuation. The measure will not apply to employer ETPs that are rolled over into a super fund before July 1, 2004.
n The Government will remove the need for a super fund to obtain an actuarial certificate in order to receive a tax exemption in relation to allocated pensions and the new complying market-linked pensions, with effect from July 1, 2004.
Currently, super funds receive a tax exemption on the income they receive from assets supporting their current pension liabilities. In order to qualify for the exemption, they are required to obtain an actuarial certificate stating that the assets are needed to meet the fund’s pension liabilities.
n The Government will remove the work test requirement governing who can contribute to superannuation for those under the age of 65, with effect from July 1, 2004.
Currently, in order to make superannuation contributions, a person below the age of 65 must have worked at least 10 hours in a week at some time in the previous two years, unless certain specific circumstances exist.
Removing this requirement will open up access to the superannuation system, allowing anyone under the age of 65 to save for their retirement in a prudentially supervised and concessionally taxed environment.
Taxpayers who become eligible to contribute to superannuation may also be able to claim a tax deduction for their contributions, provided they satisfy the relevant tests. However, to qualify for a tax deduction, a person under the age of 18 will also be required to satisfy a work test in the year they contribute. This is intended to ensure the deduction is not abused, and will not affect the person’s ability to contribute.
n The Government will require super funds to start paying out benefits to members as soon as practicable after they reach the age of 75, either as an income stream or a lump sum, with effect from July 1, 2004.
Currently, persons over the age of 75 can keep their benefits inside a super fund if they work at least 30 hours per week. This means they may not have to access their superannuation benefits at all during their lives, which could allow superannuation to be used specifically for estate planning purposes.
The measure will ensure that superannuation is used for its intended purpose of supporting income in retirement. The change will not apply to people over 75 who still receive superannuation contributions under an industrial award.
The measure is expected to result in a reduction in superannuation earnings tax, but this will be more than offset in later years by increased personal income tax from investments.
