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Self Managed Super Fund (SMSF) Article
RBL System Explained
By Tony Negline.
This article may be out of date.
9th November 2005
For almost twenty five years the tax system has sought to limit the level of tax concessions available from the super system.
The access to these concessions has been restricted in several ways. One of the most important ways has been to place a limit on the amount of money any one person can accumulate in the super system before retirement and not face punitive tax.
Between 1980 and 1988 the government allowed the Australian Taxation Office to decide what limit should be placed on the level of benefits that could be funded in super. This system was full of holes and was openly abused.
In May 1988 the government announced massive changes to the super system including the introduction of Reasonable Benefit Limits for most retirement or employment termination benefits. We were told that RBLs were designed to “ensure the distribution of [tax] concessions is more equitable”.
Initially the government gave the job of administering RBLs to the Insurance and Superannuation Commission but it couldn't handle all the paper-work. In 1992 the Australian Taxation Office were given this poison pill and has held it ever since.
At a legislative level the RBL system does not look very complicated. The practical application of the RBL system is another matter altogether. For the uninitiated, the system is mind blowingly confusing and complex. Under the current system, one wrong innocent lump sum taken or pension started could see a taxpayer denied access to a lifetime of concessions.
For investors it is fundamentally important is to make sure your lump sum or pension RBL are as large as the law allows them to be because it is these RBLs which determine the level of tax concessions you will get out of superannuation. The more tax concessions a taxpayer can access the higher their retirement income will be.
We are all allowed a flat dollar RBL. These flat dollar RBLs began in July 1994 and are indexed every 1st July by movements in average weekly earnings. The flat dollar pension RBL was $800,000 in 1994/95 and is now worth almost $1.298 million in 2005/06. The lump sum RBL was worth $400,000 and is now worth just under $649,000.
Before July 1994, everyone had an RBL based on their salary. And to protect higher income earners who were approaching retirement and had based their future on their salary based RBL the government introduced the Transitional RBL or TRBL.
If an investor wants a TRBL they must apply to the ATO. Under the initial policy design a taxpayer had to apply to the ATO by December 1996. This cut-off date was later extended to December 1997 and then dropped altogether. You can make new TRBL applications and asked for an application already submitted to be adjusted.
Unfortunately in DIY Super's experience far too many people get their TRBL application wrong and get a lower TRBL than they are really allowed. People sometimes think incorrectly think they don't qualify or if they do think they qualify then they don't fill out the form correctly.
There are three sets of rules:
- for those aged under 45 on 1 July 1994 – a TRBL is available when a person's total super benefits and their salary based RBL are both more than the flat dollar RBLs that applied in 1994/05
- those aged at least 45 but under 50 on 1 July 1994 – a TRBL will apply when a person's salary based RBL and a formula involving their total super benefits is greater than the flat dollar RBLs
- those aged at least 50 on 1 July 1994 – a TRBL will be available when their salary based RBL is greater than the flat dollar RBLs
Typically the mistakes are as follows:
- under-estimating salary especially for people who have lived and worked overseas for a number of years (this applies to all age brackets above) or for owners of small businesses. Owners of small businesses who take a reduced salary can apply to the ATO to have an larger independently assessed arm's length salary used to determine their salary for RBL purpose. Over the years the ATO has issued many Interpretative Decisions that tell us when they will or will not allow an arm's length salary to be used
- under-estimating total super benefits – this is especially the case for people who were employed by firms with good retrenchment or retirement golden handshake benefits
Another common mistake is to believe that TRBLs are not indexed. All RBLs – both flat dollar and transitional – are indexed each 1 July by the previous year's movement in average weekly earnings. Since July 1994 RBLs have been indexed a total of 62.2%.
This might seem like a healthy increase but over the same period, the S&P/ASX 200 Accumulation Index has increased by over 200%. (This index measures market movement of the top 200 Australian listed companies and also assumes that all dividends are re-invested.)
As market returns tend to be better, on average, than wage increases there is a distinct possibility that in time many people will see their super assets grow to become bigger than their RBLs. Eventually some reforms and simplification need to take place but the government seems remarkably reluctant to tackle this monster.
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