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Self Managed Super Fund (SMSF) Article
New rules not so simple
By Tony Negline.
This article may be out of date.
21st June 2006
Last week Peter Costello lifted some of the confusing fog that surrounds the government's latest superannuation simplification measures.
The Treasurer announced changes to two important proposed rules.
The first rule change involves the requirement for retirees who are aged at least 65 to access their super assets.
Under current law an investor who is at least 65 but under 75 has to be gainfully employed for at least 240 hours during the previous financial year in order to keep their super monies accumulating away. At the start of each financial year a trustee has to actively test the employment status of their accumulating members who are aged at least 65 but under 75. People who do not provide the necessary proof can find their benefits compulsorily paid out because, without appropriate evidence, a trustee must assume a person doesn’t satisfy the 240 hours work test and their benefits must be paid out. People who turn seventy-five after June 2004 have to take their super benefits even if they continue to work full-time. People who were already seventy-five before July 2004 can keep their assets in super if they continue to be gainfully employed for at least 30 hours each week.
In a major change the government announced on 9 May this year that it intended to do away with these rules from 1 July 2007. Investors would not be required to take money out of super at any age.
Under this original announcement super fund members over 65 who fell foul of the current rule before July '07 would have had to take their super monies. Fortunately the government has seen the folly of this original announcement and said that older investors will not be unnecessarily inconvenienced and the new rule will apply from 9 May.
What happens to super investors who have already taken their super monies out because of the old rules only to find that a new set of rules will apply? Can they return their super monies because it was paid out incorrectly? Clarity in this issue would be great but it is unlikely to be given. Good legal advice might be essential.
The second change involves the new limitation on undeducted contributions. On budget night the government said that they would immediately be restricted to $150,000 in a financial year. The government also floated the idea of allowing three years of undeducted contributions (that is, $450,000) in one hit to help people cater for larger one off payments.
When these limitations were announced, there was much confusion. No one knew if the $150,000 rule would apply for all of 2005/06 or the period between budget night and 30 June. Equally no one knew the status of the $450,000 limit. The government merely said that it would “consider” it. In other words no one knew if it was a definite policy and when it might apply.
Peter Costello has confirmed:
- everyone will be limited to $150,000 in undeducted contributions each financial year
- a person can contribute $150,000 between 10 May and 30 June this year regardless of the amount of contributions made before 10 May
- the $450,000 limit will be allowed. Anyone who uses this rule will not be allowed to contribute any further undeducted contributions until three years have elapsed. For example if a person contributes $450,000 during the 2006/07 year then they will not be allowed to make an undeducted contribution before the start of the 2009/10 financial year. Importantly the $450,000 limit could be used between 9 May and 30 June 2006 but this would mean that further undeducted contributions could not be made until the 2008/09 financial year
- the Treasurer also confirmed that this limit will not apply to the rollover of any capital gains tax concession claimed by a small business owner after the sale of their business.
Under the government's plan if a person contributes more than these limits then those excess contributions will be returned and any earnings will be taxed at the highest marginal rate (46.5% including Medicare levy).
Clearly there are still many aspects of this new contribution rule that we do not know. For example will this limit apply to contributions made by a spouse?
Also some people who were planning to make large undeducted contributions in the not too distant future are adversely affected because they can no longer implement their plans. One industry commentator recently claimed that the government isn't too concerned about giving this small number of people any flexibility because in all likelihood most of them live in safe Coalition seats.
The super industry would very much like to get clarity about the long list of outstanding problems and concerns about the governments new super rules. Hopefully we will not have to wait too long before we hear the next instalment.
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