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Self Managed Super Fund (SMSF) Article
Plans to sidestep Better Super problems

By Tony Negline.

This article may be out of date.

14th June 2006

The next thirteen months will be difficult for anyone trying to plan for their long-term retirement income needs.  The complications lie in the fact that the government has announced a plan to radically alter the superannuation environment.  Between now and early August the government intends to seek feedback on its plan.

Based on that feedback the government will then refine its policy and then draft some laws.  In reality these laws will not be finalised until the first half of 2007.

The government has said that it does not intend to change its announced policy.  (The obvious question to ask, is why seek feedback if you have decided not to pay too much attention to divergent views?)  Whilst the government has a majority in both Houses of Parliament it can pretty well do whatever it likes.

However as the recent back flip on the sale of the Snowy Hydro has shown if there is sufficient public disquiet about a government policy it will change tack.  To put it plainly there is no certainty that the announced plan to simplify and streamline superannuation will be fully legislated and ready to apply before July 2007.  Already some super fund operators are telling me that they are deeply concerned about their ability to be ready by July 2007.

So what should investors be thinking about between now and July 2007?  There are at least eight issues to consider:

• Personal contributions claimed as a tax deduction –it is currently possible for people who are not working to be able to claim their personal contributions as a tax deduction.  This can be a very handy way for some investors to cut their personal tax liabilities.  The government’s plan does not definitively tell us that this concession will continue to be available beyond June 2007.  Therefore some investors may want to access this concession before it is no longer available
• Work tests for contributions after age 65 and under age 75 – under current law, contributions after 65 and before 75 can only be made if certain work tests are satisfied.  Will these work tests continue to apply after June '07?  The Institute of Chartered Accountants says that they were told that these work tests will still apply from July 2007.  From July 2007 however it may be possible to claim those contributions as a full tax deduction.  When would be the best time to most tax effectively make those contributions?
• What impact will Reasonable Benefit Limits have if an investor takes a benefit before July 2007?  Investors who can delay generating an excess benefit before July ’07 should do so to avoid the tax penalties that may no longer apply under the new regime
• From July 2007 the government intends that a new pension will be offered and new allocated pensions (AP) will no longer be available.  APs that begin before July 2007 will be allowed to continue.  Should an investor begin an AP before July 2007?  Will an investor be allowed to transfer from an allocated pension easily?  How will the new product operate?
• Similarly new Term Allocated Pensions (TAPs) will not be available from July 2007.  Under current rules once a TAP starts it cannot be stopped.  Will the government relax this rule?  Currently only 50% of a TAP’s account balance will be counted as an asset for the Centrelink’s assets test.  We do not expect this exemption to be available for income stream products which commence after 19 September 2007.  Should an investor who can benefit from this asset test concession buy a TAP before they disappear or are they better to use other income stream products that also get the same concession?
• Should an investor take money out of their super fund, pay any lump sum tax and contribute the net amount back into super?  From July 2007, this strategy does not improve the tax efficiency of a pension after an investor turns 60 because these pensions will not be taxed.  My analysis shows that investors aged between 55 and 60 will not get much benefit from this once very popular strategy.  However it may provide some benefit to anyone who wants to pay a lump sum death benefit to a non-dependant child.
• From July 2007 ex-employees will not be allowed to rollover any portion of their termination benefit to a super fund and the concessional tax treatment on these benefits will be severely limited.  Some employers and employees will want to maximise their opportunities under the current regime.  Some senior executives may decide to retire before July 2007.

Finally, what benefit is there is splitting super contributions with a spouse?  One argument says that given that after sixty pensions and lump sums will be tax-free there seems little point.  At face value this is a reasonable argument.  Personally I think it is short-sighted.  Anyone who thinks the government will not change the taxation of super benefits over the next forty years is being a little optimistic.  Contribution splitting therefore offers a relatively simple way of minimising the risk that the next suite of super tax changes will not leave you short-changed.

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