Treasurer Peter Costello’s eleventh and possibly last Budget delivered a range of tax and super initiatives that will provide potentially large benefits to richer and older Australians. The tax cuts will provide an extra $10 a week to average wage earners and gains of over $119 a week to those on the highest marginal tax rate.
Personal tax cuts
With effect from 1 July 2006, the 30% threshold will rise to $25,001; the 42% marginal rate will be cut to 40% and its threshold will rise to $75,001; the top 47% marginal rate will be cut to 45% and its threshold will rise from to $150,001.
But it is the sweeping changes to superannuation that are the real feature of the 2007 Budget. As most clients would now be aware, the proposed reforms effectively mean that people aged over 60 will pay no tax on money taken out of super, either as a pension or lump sum, from 1 July 2007. Reasonable benefit limits (RBLs) have been abolished, which will be music to the ears of financial advisers and accountants, as have aged-based contribution limits. The payment of super benefits, employer ETPs and death benefits have also been streamlined and generally given more favourable tax treatment.
With effect from 1 July 2007, taxpayers aged 60 or over will be exempt from any tax on benefits paid from a taxed super fund (whether in lump sum or pension form).
Reasonable benefit limits (RBLs) and age-based limits will be abolished.
A universal contribution limit of $50,000 will be introduced for employer contributions and $150,000 for personal contributions.
The self-employed will be able to claim a full deduction for their superannuation contributions.
The ability to make super contributions will be extended to age 75 but work test will still apply.
Where a member does not quote their tax file number, personal contributions will not be allowed.
There have also been some important changes to the social security asset test rules which will mean home-owning singles can have an extra $165,000 in assets and still receive a part pension. For couples, the asset test limit has been increased by $275,000. This has been done primarily to compensate for the scrapping of the 50% and 100% exemptions for complying pensions and annuities that existed previously.
How do the changes affect me?
A number of clients have contacted us during the past week with concerns that the superannuation changes will be negative for them, particularly pre-retirees who are worried about the new contribution limits. Given the breadth of the planned changes, this is understandable but after reading through the full report, our view is that most clients will gain under the new regime and will be able to meet their retirement objectives via the proposed transitional arrangements.
One important thing to note is that the superannuation reforms are just proposed changes at this stage. They are open for comment until 9 August and draft legislation is unlikely before the end of the calendar year. Some changes appear almost inevitable with Treasurer Costello already hinting that the $150,000 limit on personal super contributions may be varied or subject to a three-year averaging provision.
Implications for retirees
For those who are retired, or aged over 60, the superannuation and tax changes are undoubtedly good news. From 1 July 2006, this age group will benefit from tax cuts, an increase in the Low Income Tax Offset, more generous criteria for the Senior Australians Tax Offset and higher Medicare Levy thresholds. Most of the superannuation reforms will begin on 1 July 2007 and from 20 September 2007 the new social security and asset test rules will take effect. Possible problems for pre-retiree business owners
The implications for those aged between 50 and 59 are slightly more problematic but most clients are unlikely to be adversely affected in our opinion. Until 2011/12, there will be transitional arrangements which will allow workers aged over 50 to contribute $100,000 each year to super through salary sacrifice / employer contributions and a further $150,000 in undeducted / personal contributions. These changes take effect from 9 May 2006.
One potentially disadvantaged group could be business owners who are not able to take full advantage of the small business retirement concessions. The solution will probably require undeducted contributions to be made over a longer period of time in the lead up to selling their business.
For those aged under 50, the news is once again positive. The flat super contribution limit of $50,000 is higher than the present age-based limits and the rules for self-employed people, both in terms of tax deductibility and access to the Government co-contribution scheme, are more favourable.