By Michael Houlihan,
Manager Retail Products and Technical Services, Vanguard Investments
16 June 2006

In the May Federal Budget, Treasurer Peter Costello announced some of the most significant changes to the superannuation system in the last 20 years, reversing many policy initiatives previously introduced by Labor Governments.

The Government issued the proposed changes via a consultation paper entitled "A plan to simplify and streamline superannuation". The majority of the proposals outlined in the paper are scheduled to take effect from 1 July 2007 with the remainder commencing from Budget night, 9 May 2006.

The following is an explanation of the changes as proposed in the 2006/07 Budget.

Simplified taxation of benefit payments from 1 July 2007

Any lump sum superannuation benefit paid from a taxed superannuation fund will be tax-free and will not be included in assessable income for superannuation members aged 60 and over.

Pension payments to individuals will be tax-free, again, there will be no requirement to report anything to the Australian Taxation Office from either the superannuation fund or the individual.

For members who can access benefits prior to age 60, there will be a simplified tax treatment. For these members who take a lump sum benefit, their benefit will comprise only two components, a Tax exempt component and a Taxable component - the taxable component being taxed at the current concessional tax rates.

In line with the removal of tax on all types of benefit payments from superannuation funds, the Government will abolish the Reasonable Benefit Limits (RBLs) that apply to these benefits payments. An RBL is the maximum amount that can be paid from a superannuation fund that will receive concessional tax treatment with anything above this limit taxed at the highest personal marginal tax rate.

Simplified contribution rules

With effect from Budget night, the Government has limited the amount of undeducted contributions that a super fund member may contribute each year to $150,000 per annum. The Government has since announced transitional measures for the first few years which allow undeducted contributions above this amount to be averaged over three years, provided they do not exceed $450,000 over the three year period.

Currently, deductible contributions to a superannuation fund are concessionally taxed at 15 per cent and the ability to claim a tax deduction for the contribution is based upon certain limits depending on your age. With effect from 1 July 2007, these aged-based Maximum Deduction Limits will be abolished and replaced with a deductible contributions limit of $50,000 per annum regardless of age.

As a transitional arrangement, members who are over age 50 at 1 July 2007 will be entitled to a limit of $100,000 per annum until 2012.

Simplified payment rules from 1 July 2007

Under existing rules, once a member of a superannuation fund reaches age 65 and is not working a certain number of hours per week, they are required to either commence a pension or to take a lump sum payment from their fund.

From 1 July 2007, members of superannuation funds will no longer be required to take their superannuation benefit after age 65 if they do not meet the current work test requirements. Members will be able to choose when they draw down on their superannuation during retirement and will be able to choose to:

• Take a single lump sum,
• Withdraw amounts as lump sums when the need arises,
• Convert accumulated entitlements into a pension that meets the minimum standards (in which case investment returns within the fund will not be taxed), or
• Leave the benefits in accumulation phase indefinitely (in which case investment returns within the fund will contine to be taxed at the fund rate).

Under the current legislation, it is a requirement that allocated pension payments be made each year in between a minimum and maximum amount which is determined each year based upon the persons' age at 1 July. The Government will simplify the minimum standards for pensions. Under the proposed changes any pension will meet the minimum standards if the payments are in line with the minimum annual amounts as outlined in the following table:

Changes to the assets test from 20 September 2007

The Government, in its Budget, has also proposed that there will be adjustments to the way certain assets are measured for the purpose of the assets test to receive the aged pension. Under the current rules, only 50% of the assets in a complying pension (which includes complying lifetime and fixed term pensions together with the more recent market linked income streams) are asset tested for the age pension while 100% of the assets in an allocated pension are assets tested. It is proposed that with effect from 20 September 2007, 100% of the assets of any pension will be asset tested but the amount of pension reduction will be reduced across the board. What this means is that the Government is proposing to halve the pension assets test taper from $3.00 to $1.50 per fortnight for every $1,000 of assets above the assets test free area.

Easier way to transfer superannuation benefits

One of the most frustrating administrative processes has always been when you are trying to consolidate your superannuation benefits into the one account. Certain superannuation providers seem to go out of their way to make the process of rolling over from one superannuation fund to another extremely difficult. With this in mind, the Government will produce a new standardised form (including standard proof of identity requirements) to be introduced to facilitate the transfer of benefits between superannuation funds. The Government will also reduce the maximum time period for this transfer to occur from 90 days to 30 days.

So what happens now?

The Government's proposals are currently in the form of a consultation paper. The Government has called for submissions by 9 August 2006 and has suggested that draft legislation will be released before Christmas 2006. The aim then is that this will finally be legislated in May 2007.

The issue with this is that while some of the proposals commence on 9 May 2006, we will have to wait 12 months to get final detail on the other changes. Unfortunately, these are always subject to change.

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263 / RSE Licence L0001335) is the product issuer. We have not taken your circumstances into account when preparing this publication so it may not be applicable to your circumstances. You should consider your circumstances and our Product Disclosure Statement (PDS) before making any investment decision. You can access our PDS at www.vanguard.com.au or by calling 1300 655 102. Past performance is not an indication of future performance. This publication was prepared in good faith and we accept no liability for any errors or omissions.