On Budget night earlier this year, the Federal Treasurer released a consultation paper, A Plan to Simplify and Streamline Superannuation, proposing widesweeping changes to Australia's superannuation rules. The consultation period has now ended and the Government has released changes to its original paper. Michael Houlihan, Manager Retail Products and Technical Services explains the major refinements to the Government's plan below.

Undeducted contributions
The $150,000 contribution limit announced in the Budget will now not take effect until 1 July 2007 and will be indexed each year. People under 65 will still be allowed to "average" the undeducted contribution over a three year period, for example, contributing $450,000 in the 2007/08 financial year but then another contribution cannot be made until the 2010/11 financial year.

• Between 10 May 2006 and 30 June 2007, investors will now be allowed to contribute up to $1 million in undeducted contributions.
• Contributions in excess of the thresholds mentioned above will be taxed at 46.5%. Under the government's original plan these were to be refunded to the investor with penalty tax on deemed amount of the earnings.

You must still satisfy the "work tests" that exist under the current rules, which are dependant on your age, to be able to make an undeducted contribution.

Deductible contributions
The current aged based deduction limits on contributions apply until July 2007. From July 2007 onwards, there will be no limit on how much a person can claim as a tax deduction although there will be a limit on how much of that contribution can be concessionally taxed. Deductible contributions up to $50,000 will be taxed at 15% with contributions above this threshold being taxed at the highest marginal rate (46.5%).

From 1 July 2007, a transitional period will apply which will allow people aged 50 and over to make a deductible contribution of $100,000. This limit will only apply for the financial years 2007/08 to 20011/12. This transition rule also applies to people who turn 50 during that period. The $100,000 limit will not be indexed and while amounts contributed up to that limit will be taxed at 15%, amounts contributed above this limit will be taxed at the highest marginal rate (46.5%).
The above limits also apply to self-employed persons.

Tax file numbers and contributions
Under the current rules there is no requirement to quote a tax file number before making a contribution.

Under the proposed rules, members of superannuation funds who have not quoted a tax file number to their fund will be taxed at the highest marginal tax rate (46.5%) for taxable contributions over $1,000. For members who join a fund after 1 July 2007 and a tax file number has not been quoted to a super fund, ALL taxable contributions will be taxed at the highest marginal tax rate (46.5%).

Funds will not be required to apply the higher tax for accounts where a tax file number has not been quoted until 30 June each year. This will give people until 30 June 2008 to quote their tax file number.

Also, a superannuation fund will only be able to accept undeducted contributions after 1 July 2007 on behalf of a member if that member has advised the super fund of their tax file number.

Self Managed Superannuation Funds
The Government has been concerned about the rapid growth of the Self Managed Superannuation Fund (SMSF) segment of the market for some time. SMSFs currently account for approximately 23 per cent of the assets in the superannuation system.

The Government is also concerned at their level of compliance with superannuation law and the level of trustee education and understanding of their responsibilities.

The Government intends to give the Tax Office $112 million to more actively supervise SMSFs and will introduce a range of changes to ensure that SMSFs comply with their legislative obligations. Additionally, the Government will increase the penalties on SMSFs that do not complete their annual return requirements and will increase the annual lodgement fee to $150 per fund (currently $45).

New pension rules
Under the new arrangements, all payments from pensions that meet simplified minimum standards will be tax free and earnings on assets supporting these pensions will remain tax exempt.

Pensions that meet existing rules and commenced before 1 July 2007 will be deemed to meet the new minimum standards. In other words, there is no requirement to commute an existing allocated pension in order to recommence a pension under the new rules.

Also, there will be no provision to allow someone to commute a complying pension.

What are the next steps?
The next step in the process to simplify and streamline the superannuation system is for the Government to release draft legislation over the coming months (proposed by Christmas 2006) and educational material on the changes.

Final legislation is anticipated to be approved in early 2007.

For a comprehensive summary of all of the proposed changes to the superannuation system please visit the Government's Simpler Super site.

Smart Investing
By Robin Bowerman
8 September 2006
Principal & Head of Retail, Vanguard Investments Australia
www.vanguard.com.au