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Self Managed Super Fund (SMSF) Article
2005 Federal Budget Commentary
By Tony Negline.
This article may be out of date.
18th May 2005
For superannuation investors the weeks leading up to the Federal Budget are always nervous times. Everyone knows there will be changes and the fear is that they will either be poorly thought out or just plain bad.
In last weeks Federal Budget, the government made five changes to the superannuation rules and happily all of them are positive.
The best news is the abolition of the super surcharge. This horrible tax, with an even more ghastly collection system, will no longer be paid on super contributions made after 30 June 2005.
If you will be paying the surcharge on contributions made this financial year then you might consider making this contribution next financial year.
There are a number of matters to think about before waiting to make those contributions.
What is the most tax efficient thing to do? If contributions are made next financial year then a person’s or company’s tax bill for this year might be higher.
Employers should note that they don’t have to make Super Guarantee contributions for the June quarter before 30 June. In fact these contributions don’t have to be made until 28 July.
Can someone who is part of a salary sacrifice arrangement ask their employer to delay making the contributions until July 2005? According to Scott Charaneka, partner at the law firm Deacons, it certainly makes sense to look at these arrangements. “Depending on the terms of the arrangement there may be some scope to delay contributions”, he said.
Charaneka warns that “any proposed change to a salary sacrifice arrangement must be carefully analysed because the wrong changes might void the whole agreement”.
On another note, the personal income tax cuts and the increases in the Family Tax Benefit have reduced the tax effectiveness of superannuation, especially employer contributions, for most taxpayers. It is important for investors to carefully analyse what their best strategy is once the tax cuts begin. For some people it will be better to forego future salary sacrifice arrangements and aim to get the government co-contribution especially if they have a low-income earning partner.
Having said that the pre-retirement super fund tax rate is 15% whereas an investor will have an average tax rate (that is, the average amount of tax you pay on every dollar of income) of at least 15% on their income if they earn more than $27,500 and they are not eligible for any government rebates or other hand-outs.
In other announcements, the government has once again committed itself to allow spouses to split contributions. However as part of the budget the government has announced some adjustments to its original policy, first released in 2001.
This policy was originally meant to start in July 2003, got pushed back to July 2004 and has been delayed again and will now begin on 1 July 2006. Under the original policy, most super funds would have been made to offer contribution splitting. However the government has agreed that splitting should now be voluntary for super funds.
It will be a surprise if most super funds don’t provide contribution splitting because of the significant after-tax benefits that are possible under this measure. For example take Bill who has not retired from the workforce by has total super assets greater than his pension RBL.
There is little sense in Bill’s employer making new employer superannuation contributions because those contributions will be taxed at 15% on entry to super and will probably be taxed at 48.5% tax when they are taken out. (Under the Super Guarantee rules because Bill has super assets greater than his pension RBL he can irrevocably ask his employer to stop making contributions for him.)
However if Bill’s wife Dora has little or no superannuation then Bill will be able to transfer his super contributions to Dora’s super account which will make the retirement benefits much more tax effective.
It is a pity that people like Bill cannot split his whole super benefit with Dora. Charaneka said that the fund’s management industry has been lobbying for benefit splitting for sometime without much success.
The government has announced a minor amendment to the Super Guarantee rules to help employers comply with these rules. Under current rules, if an employer doesn’t pay the Super Guarantee within 28 days after the end of a quarter, then non-tax deductible penalties automatically apply. To make matters worse for employers, if they try and do the right thing and actually make contributions to a super fund then those contributions are not counted against the Super Guarantee penalties.
The government has decided to provide some minor relief. It has decided that employers who pay their SG contributions within 30 days of the SG due date – this would mean 27 Feb, 28 May, 28 July, 28 Nov – will be able to reduce their SGC debt by those contributions.
This change is expected to begin on 1st January 2006.
In this year’s budget there was no announcement on the future of new defined benefit pensions in small super funds. On this measure the government will keep us guessing for a little while longer.
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