Australia's super system is gearing up to undergo significant changes from 1 July this year. We've prepared this summary to help you identify some of the major changes and how they might affect you.
Why is super changing?
A raft of changes announced by the federal government in May 2006 are intended to make Australia's complex superannuation system simpler for super fund members and retirees, and to provide greater incentives for Australians to save for their own retirement.
Are the changes final yet?
The changes outlined below are a summary of some of the major changes. All of the changes are currently before the Australian Parliament and most are due to come into effect from 1 July 2007. However, it is important to note that the legislation is not yet finalised, and therefore the information provided below may still be subject to some change before it becomes law.
A refresher course: how super works
Before we explain the individual changes affecting limits and taxes on contributions, and affecting benefit payments, here's a helpful reminder about how super works.
Putting money into your super while you're working
Money goes into your super fund in the form of contributions. These can come from the following sources:
Employer contributions - when your employer contributes a minimum of 9% of your salary to your super on your behalf;
Personal contributions - when you make extra contributions to your super in either of the following ways:
Before-tax contributions, such as salary sacrifice (known as 'concessional' contributions);
Personal after-tax contributions (known as 'non-concessional' contributions).
There are new limits on how much you can contribute to your super. These limits are explained in more detail further on.
Government taxes on contributions
The government levies a 15% contributions tax on most of the contributions that go into your account. Note that after-tax personal contributions are not taxed - that's because you've already paid income tax on this money before you contributed it to your super account. Also, any Super Co-contribution payment you may receive from the government does not incur contributions tax.
Taking your super as a retirement benefit once you stop working
When you retire, you can draw down your super to provide you with an income. You can take your benefit as:
a lump sum;
as a pension, which, depending on the type of pension you choose, can allow you to draw your benefit in the form of ongoing regular payments, or as lump sums, or a bit of both.
There may be tax payable on lump sum benefits if you retire before age 60.
Important: make sure your fund has your Tax File Number!
One of the most important changes for you to be aware of is the need for you to provide your super fund with your Tax File Number (TFN). Up until now, it hasn't been compulsory for you to provide your TFN to your super fund, but if you don't, your benefits can be taxed at the highest marginal rate (currently 46.5% plus the Medicare levy, so 48% in total), instead of 15%.
However, the new system imposes even harsher penalties. From 1 July 2007, if you haven't given your super fund your TFN:
your employer contributions (that's the compulsory 9% that your employer contributes to your super on your behalf) will be taxed at the top marginal rate (remember, thatfs 48% in total at the moment), instead of just 15%;
your super fund will not be able to accept any personal after-tax contributions that you make to your super fund. For example, if you were planning to make a personal after-tax contribution to your super in order to take advantage of the Government Super Co-contribution, your fund would not be able to accept your contribution, and so you would not qualify for the co-contribution.
Providing your TFN
So, save yourself the hassle and make sure your super fund has your TFN. You've got until 30 June 2008 to do so. If you're not sure if your fund has your TFN, check your most recent super statement. Most super funds now indicate on your statement whether or not they have your TFN. For example, you may find the words: "Tax File Number not provided" on your statement, or it may say: "Investor TFN held? Yes".
Alternatively, a quick phone call to your super fund should tell you either way.
If you're worried about privacy matters and giving your super fund your TFN, talk to your fund about the procedures they have in place to protect your privacy.
You employer contributions (also including any salary sacrifice contributions you might make) will be limited to $50,000 per year. These contributions will be taxed at 15%. However, if your employer contributions exceed this cap, they will be taxed at the highest marginal rate plus the Medicare levy.
You can keep making before-tax contributions until you turn 65. After that, and up to age 75, you can make before-tax contributions provided you worked at least 40 hours in a period of no more than 30 consecutive days, in the same financial year in which you made the contribution.
Will you be aged 50 or over between now and 30 June 2011?
There is a grace period in place that will affect people who are aged 50 and over, or who will turn 50 between 1 July 2007 and 30 June 2011. If you fall into this category, you can make a concessional contribution of up to $100,000 a year and it will still be taxed at the 15% rate (rather than at the higher rate that applies if you go over the usual $50,000 cap).
From 1 July 2007, you'll be able to make up to $150,000 of personal after-tax contributions to your super. These contributions will be taxed at 15%. If you exceed this limit, the contributions will be taxed at the full marginal rate plus the Medicare levy. Note that limit will be averaged over three years, so, in one year, you could potentially contribute much more, as long as over a three-year period you don't exceed a total of $450,000.
This particular change has already come into effect, as it's been applied retrospectively from Budget night, 9 May 2006.
Have you had a recent financial windfall?
There's a grace period in place for this type of contribution as well. Up until 1 July 2007, you can make after-tax contributions of up to $1 million to your super. Not many of us will be in a position to do that, but if you've found yourself the lucky recipient of a windfall such as an inheritance, or if you've sold a family property for example, you might want to consider the potential tax benefits of transferring the proceeds to your super fund. Of course, you'd need to seek independent financial advice before doing so, in order to determine the best course of action for your personal financial situation.
Changes to your benefits from 1 July 2007
No tax on benefits taken after you turn 60
According to the new rules, no matter how you take your super benefit once you retire (i.e. regardless of whether you take it as a lump sum or a pension), you can withdraw the money tax free. Note that if you take your benefit before you reach age 60, tax will continue to apply to any benefits taken in the form of a lump sum, as it does now.
Keeping your benefit in super
You no longer have to withdraw your benefits once you reach age 65 and stop working. Now, your benefits can stay in the super system for as long as you want them to.
Changes to pensions
Pensions are also affected by the new rules. Some of the major changes are outlined below.
You must take a minimum payment from your pension each year (at least), but there is no longer an upper limit on how much money you can withdraw from your pension. So, as long as you cover that minimum withdrawal, you can then take out as much as you wish from your pension (including the whole amount if you so desire).
Pensions commenced under the government's 'transition to retirement' rules will incur a maximum annual payment limit of 10% of the account balance at the start of each year.
The 50% Assets Test exemption will be removed for new complying income streams purchased on or after 20 September 2007 (such as 'indexed pensions' and 'term allocated pensions'). At the same time though, the government will reduce the Pension Assets Test taper rate from $3 per fortnight to $1.50 per fortnight. This means that if you're a retiree, you'll only lose $1.50 in age pension for every $1,000 of assets that you have above the threshold, rather than the $3 you would currently be losing.
Other changes
Reasonable Benefit Limits abolished
Reasonable Benefit Limits (which were once used to impose limits on how much of your super you could withdraw at a lower tax rate before a higher tax rate then kicked in for the remainder), have now been abolished. And remember, from 1 July 2007 there will be no tax payable on benefits taken from age 60.
Death benefits
Under the new rules, in the event of your death, all lump sum death benefits made payable to one of your dependants will be tax free. If your death benefits are paid to a non-dependant, then the post-June 1983 component of your super would be taxed at 15%.
For more information
This document is only a summary of some of the major changes to Australia's new super system and is intended as general information only. It is not intended to be a substitute for professional advice. The information in this document may or may not affect you, depending on your financial circumstances. If you'd like to find out more, try the following reference points for assistance:
contact your super fund and find out if they have any more information that may be of assistance;
contact an independent financial counsellor or financial adviser, who will be able to look at your individual financial situation and explain how the changes may affect you.
MoneyMinded meets the Financial Literacy Foundation's Essential Elements eligibility and assessment requirements and has been assessed as being of good quality.
MoneyMinded offers independent and unbiased consumer education. Its development was initiated and funded by ANZ with contributions from the community sector and education experts. It does not contain any ANZ branding or promotion of financial products and services.
