Significant Taxation Reforms to Superannuation

Presenters:

Shayne Carter, Director, Greenwoods & Freehills Graham Warren, Tax Consultant, Greenwoods & Freehills Michael Vrisakis, Partner, Freehills

• “The beauty is in the detail”

• Le Corbusier

The Detail

• Tax Laws Amendment (Simplified Superannuation) Bill 2006

• Superannuation (Excess Concessional Contributions Tax) Bill 2006

• Superannuation (Excess Non-Concessional Contributions Tax) Bill 2006

• Superannuation (Excess Untaxed Roll-Over Amounts Tax) Bill 2006

The Detail cont’d

• Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006

• Superannuation (Self Managed Superannuation Funds) Supervisory Levy Amendment Bill 2006

• Superannuation Legislation Amendment (Simplification) Bill 2007

• Income Tax Amendment Bill 2007

The Detail cont’d

• Income Tax (Former Complying Superannuation Funds) Amendment Bill 2007

• Income tax (Former Non-Resident Superannuation Funds) Amendment Bill 2007

• Income Tax Rates Amendment (Superannuation) Bill 2007

More to come

• Income Tax Regulations

– Defined Benefit; notional taxed contributions

– Superannuation annuity

• Remedial amendments – particularly in relation to income streams

Order of presentation

Shayne Carter

• Contribution limits

• Income streams

• Termination payments

• Transfer from non-resident funds

Graham Warren

• TFNs

• Notices of deduction

Order of presentation cont’d

Shayne Carter

• Section 279D death benefits

• Recent amendments/consequential changes

Michael Vrisakis

• Associated legal issues

Existing rulesContributions – Current Rules

• Age based limits

under 35 $15,260

35 to 49 $42,385

50 and over $105,113

• Limits applied on arm’s length employer basis

New Contribution Rules

• Concessional contribution limits

• Non-concessional contribution limits

Concessional contributions

• Contribution made to complying fund

• Taxable component of a directed termination payment

• Notional taxed contributions

• Allocations within fund

Non-concessional Contributions

• Non deductible personal contributions

• Excess concessional contributions

Concessional Contributions –

New Rules From 1 July 2007

• Annual $50,000 contribution per person (15% tax levied on the fund)

• above $50,000 (15% + 31.5% levied on the individual)

• Excess concessional contributions count towards non concessional limits

Contributions: Transitional

• A transitional period is available for those 50 and over

Defined Benefits

• Special rules to determine application of concessional limits to defined benefit funds

• Calculate notional taxed contributions

• Regulations to specify method

Defined Benefits Continued

• Concession available (amounts deemed to not exceed concessional contributions limit) where;

– D.B. interest held since 5 September 2006

– Broadly no substantive rule changes

Non-concessional Contributions

• $150,000 annual limit on undeducted contributions made on or after 1 July 2007

• Up to $450,000 every three years for people age < 65

• Excessive contributions taxed at 46.5%

Transitional Provisions – Non Concessional Contributions

• Special rules apply to non concessional contributions made before 1 July 2007

• Broadly $1,000,000 available between 9 May 2006 and 30 June 2007

• Ambit expanded to include non deductible employer contributions

Exceeding the cap • Where have exceeded $1M cap member can apply to

ATO to withdraw (10 May 2006 – 6 December 2006)

Transitional Provisions: Relief

• Transitional release authority mechanism

• Person may make application to Commissioner before 1/7/07

• Commissioner has no regard to contributions post 6/12/06

Release Authority

• Person may give transitional release authority to a super provider that holds a super interest for the person within 21 days of receipt of form

• Super provider has 30 days to respond

Excess Payments; Taxation

• Section 304–15 purportedly makes benefits paid pursuant to a release authority non assessable non exempt

• May be prudent to have paid after 30 June 2007

Termination Payments

• Directed termination payments

• Most payments upon cessation of employment cannot be rolled over

• Can transfer directed termination payments

• Relates to 9 May 2006 entitlement to payments upon cessation of employment

Pensions – Where are we?

• Current rules

• Different types of pension annuities

Annuities

• common law non ETP annuities

• common law ETP annuities

• SISR (non complying) annuities

• SISR complying annuities

Pensions: Where are we? cont’d

Pensions

• Common law pensions

• SISR pensions

Pensions: Where are we? cont’d

Pensions/Annuities: Current Rules

Non ETP annuities

• Deductible amount … s.27H

• No rebate

ETP annuities/ pensions from complying funds

• Deductible amount …s.27H

• Rebates

New Rules

What has gone?

• Division 17 rebates

• ETP provisions (except s.27H)

What is new?

• Exemption on super annuities > 60

• Rebate 55 – 60

• Tax free amount

• Transitional rules

Transitional Rules

• Commencement before 1 July 2007

• Deductible amount proxy for tax free amount until:

• commutation • death• 60

Transitional Rules: Tax free amount

• Commutation

• UUPP + pre 83

• Issues

Rollovers

• Commutation of super annuity

Income Streams

Non ETP:

Rebate x

Deductible Complying (e.g. new account based):

– Exempt >60

– 55–60 rebatable

– Deductible amount/Tax free amount

ETP Common Law

Rebate?

Exemption?

Deductible amount ETP SISR (Non complying)

Rebate?

Exemption?

Deductible amount

Significant Taxation Reforms to Superannuation

Presenter:

Graham Warren, Tax Consultant, Greenwoods & Freehills

No TFN tax• 46.5% tax on ‘no TFN contributions income’

• Tax on fund: self assess in ITR

• Applies to Div 295-C assessable contribution if TFN not quoted to fund by year end

• Exception if pre-1 July 2007 account and contributions equal or less than [$1,000]

• Tax offset to recoup tax if TFN quoted in succeeding 3 years

– interest if employer failed to pass on TFN

Passing TFN onto fund

• If quote TFN to payer and payer makes super contribution then payer authorised to pass TFN onto fund: s.202DHA

• If quote to employer from 1 July 2007 then employer who makes contribution is required to pass TFN onto fund: s.229C(1)(a) SIS Act

– Previously additional prerequisite to pass on is that TFN quoted to employer for super purposes

Rejection of member contributions if no TFN

• Fund must not accept member contributions (ie not employer contributions) if no TFN

– Exception if self employed and give NOD, structured injury settlement, sm. bus. CGT, SG, small acct, Govt co-contribution

– Position of excess concessional contrib.

• If fund does accept then must refund within 30 days less: (a) fall in value of product and (b) administration costs (but not commission)

No TFN tax - issues

• Getting TFNs before 1 July 2007: ATO help

• Recognising contributions to reject

– unallocated contributions

– transfer from foreign fund, change in NOD

– [fund contributions, eg from refund of fee]

• Deducting expected tax from benefits

• TFN provided within following 3 years:

– delay in crediting account until ITR

– if member left fund or fund wound up

Self-employed:Notice of Deduction (s.290-180)

• Give valid notice in approved form before lodge ITR and before end of following year.

• Can vary downward during this time, or later if deduction disallowed

• Variation not effective if no longer member of fund, fund no longer holds contribution or already begun income stream based on contribution

• Non-conc. contrib. if deduction disallowed

Anti Detriment Deduction

Former s.279D

• Background

• Formulaic approach (EM)

New Provisions

• Application of new concepts to formulaic approach?

• Can we apply formulaic approach?

Transfers from non-resident funds

Old Rules

• otherwise assessable

• transfer of assessable amount

Transfers from non-resident funds

New Rules

• otherwise assessable

• transfer of assessable amount

• non concessional contributions

Recent Changes

• Transitional arrangements – substituted accounting periods

• Tax exempt directed termination payments

• Super Guarantee opt out

Super Simplification - Legal Issues

Long Live the Compliance Clause!

Michael VrisakisPartner, Freehills

Contributions

• need for information collection in applications and/or under trust deed

• ascertaining whether employer or personal (viz no acceptance rule if no TFN)

• ascertaining age of personal members (viz over $150k if more than 65)

Contributions (cont’d)

• quotation of TFN by employer

• quotation of TFN by members making personal contributions

Trust Deed

• provisions of trust deed to allow for tax to be calculated at member level (viz no TFN tax)

• provisions for calculation of tax-free component

• consider “stasis” position: do not have relevant information and place in “holding” account

• consider “mistake” position: where wrong TFN has been provided or status of contributions is wrong; are contributions void ab initio? (see below)

• ability to deduct tax from other interests held by member?

• ability to be indemnified by member or employer when incorrect tax deducted (viz taxed payments generally, no TFN payments)

• ability to credit tax offsets obtained (viz TFNs quoted subsequently or employer does not pass on TFN)

• use of a tax reserve?

• payments of refunds to former members (trust deed permits and SIS?)

Information to be given - specifically

• no TFN exists

• persons have reached their limit on concessional or non-concessional contributions

• notification of pre-July 1983 component

• death benefit nominations where not to dependant

• application of choice of law to new pensions/payments from 1 July

• disclosure of consequences of no TFN being quoted

• no ability to elect the withdrawal of taxable components

• is there best interests duty to protect member from themselves?

Information to be given - generally

What to tell new investors:

• section 1013D?

• material reasonable investor would expect to be informed about?

• what information can be assumed to be within knowledge of reasonable person?

• what information, if any, can be put on the website?

• what information can be disclosed, given the state of legislation?

• when to disclose; on or prior to 1 July 2007?

• what to tell existing investors?

• same information?

• use SPDS?

JUST WHEN YOU THOUGHT IT WAS SAFE TO GET BACK INTO THE WATER!

SIS Changes

• new SIS regulations

• reduction of accrued benefits?

• contribution changes (viz return of contributions)

• consequential amendments

• APRA view on rollovers and transfers

• Changes to portability

Consequential changes

• bankruptcy repercussions (with no RBLs)

• benefit design and planning (eg paying death benefits to dependant/spouse up to pension RBL)

• what about binding nominations to this effect?

How best to manage?

• probably via a new improved Compliance Clause

• some existing clauses may do the trick

• others will not

• need to contemplate some new twists and turns!

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