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Self Managed Super Fund (SMSF) Article
How Some Super Rules Will Work Under
By Tony Negline.
This article may be out of date.
13th September 2006
The Government's plan to radically alter the superannuation regulatory environment was released in May.
For the past few months, bureaucrats have been taking feedback on these proposals.
Early last week, the Government announced changes it intends to make to its original plan because of these consultations.
However, caution is advised as the Government is yet to draft legislative or regulatory amendments and there may be more changes. While there have been many small changes, they can be put into a few categories. Some go a long way to back-filling potholes in the Government's initial plans.
- * Undeducted Contributions: There are several changes in this area. Between May 10, 2006 and June 30, 2007, investors will be allowed to contribute up to $1 million in undeducted contributions. People aged at least 65 but under 75 when the contribution is made will need to make sure they satisfy a work test for that financial year. The $150,000 limit announced in May will now take effect from July 1, 2007 onwards. Investors under 65 will be allowed to contribute three years of undeducted contributions -- that is, $450,000 -- in advance. People aged at least 65 but under 75 will only be allowed $150,000 each year (if they satisfy the relevant work test) and will not be allowed to use the ``three years in advance'' rule. The Government has said the $150,000 contribution limit will be indexed but, under new rules, that will apply to contributions claimed as a tax deduction (more detail on this in a moment).
- * Self-Managed Super Funds: The Government notes that more than 50 per cent of large super contributions are made to SMSFs. The Government intends to give the tax office $112 million to more actively supervise small funds. This is a large amount in anyone's language. In addition, the Government will increase penalties for SMSFs that do not complete their annual return requirements, and will also increase the regulatory fee to $150 per fund. Over the last year, the Government has taken a reasonable amount of criticism about SMSFs from various quarters. These latest announcements go some way to addressing these issues. The Government had to be seen to be doing something.
- * Deductible Contributions: The law that applies until July 2007 limits the level of deductible contributions that can be made, based on age. These contributions are then taxed at 15 per cent. From July 2007 onwards, there will be no limit to how much a person can potentially claim as a tax deduction. Contributions up to $50,000 (indexed each year, but the indexation may not take effect each year because a complex formula will be introduced) will be taxed at 15 per cent. Contributions above this threshold will be taxed at the highest marginal rate, that is, 46.5 per cent. Assuming all other contribution rules are satisfied, investors aged over 50 at any stage after June 2007 and before July 2012 will be allowed a maximum deductible contribution limit of $100,000 for each full financial year that the person is over 50. This $100,000 limit will not be indexed. Amounts above $100,000 will be taxed at the highest marginal rate. How will this excess tax be collected? It will be an investor's liability, but they can ask super funds to pay it for them. At present, it is possible for a person not employed but allowed to make a super contribution to claim this contribution as a tax deduction. Many people use this rule to reduce income tax as they restructure their affairs just before retirement. The Government has now confirmed that this will not be possible from July 2007 onwards.
- Income streams: A new pension structure will be available from July 2007 onwards. This new pension will operate in a similar way to allocated pensions, but with some important differences. For example, there will be no maximum income. Allocated pensions that commenced before this date will be allowed to transfer to this new type of pension, but it will not be ompulsory. It will be interesting to see how many super funds make this compulsory. At present, some income streams -- called complying pensions or annuities -- provide tax concessions or Centrelink concessions that other income stream structures do not have access to. One important rule about complying income streams is that once they have commenced, the investor is not allowed to access any capital draw-downs. Since the Government announced its latest super policy some people have been lobbying it to remove this restriction. The Government has decided to ignore this lobbying and will not allow complying pension or annuity investors to access capital from that investment.
- Death benefits: Lump sum death benefits paid to dependants will be tax-free. Dependants can be paid a death benefit pension but the tax paid on the income payments will be based on the dependant's age. A young dependant child will be allowed to receive a death-benefit pension until they turn 25 years of age. Non-dependants may receive a lump sum death benefit but it will be taxed at 15 per cent, but will not be allowed to receive a death benefit pension.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.