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YourGuardian: January 2003 edition
Contents
- Welcome
- Legislation Update
- Instalment Warrants
- Salary Sacrifice Arrangements
- Super Choice
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 Welcome
Welcome! to the first edition of our monthly newsletter—Your
Guardian.
Our newsletter is intended to provide you with a brief update
of the latest changes and issues as they relate to Self Managed
Superannuation Funds (SMSFs).
We invite you to forward a copy of our newsletter to anyone you
know who may be interested.
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Legislation
Update
A number of proposed changes relating to superannuation were announced
in the Federal Budget of May 2002. Of those changes, some
have been legislated while others are still being debated.
The following are changes that have been legislated:
- Increase in the age limit for personal superannuation contributions
from 70 yrs to 75 yrs, effective from 1 July 2002. To qualify,
a person must be working at least 10 hours per week however the
amount is not tax deductible.
- Base deduction for self-employed people has increased from $3,000
to $5,000 with effect from 1 July 2002.
- Superannuation contributions for children are now permitted
from 1 July 2002, up to a maximum of $3,000 over a 3 year period.
The following are changes that are yet to be legislated:
- Proposed reduction in the superannuation surcharge from 15%
to 10.5% over 3 years.
- Co-contributions to superannuation by the government of up to
$1,000 per year for low income earners who make personal superannuation
contributions.
In addition, on 22 July 2002 the government released a consultation
paper proposing to allow superannuation contributions to be split
between spouses.
The aim of the proposal is to provide families with one main income-earner,
access to the Reasonable Benefits Limit and Tax- Free/Low-Rate Thresholds
for Eligible Termination Payments, for each spouse.
The proposed start date for the legislation is 1 July 2003 however,
following a review of the paper by the various professional bodies,
a number of problems have been identified. It is therefore very
unlikely that we will see any legislation in place for commencement
on 1 July 2003.We will keep you updated of any progress on this
topic.
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Instalment
Warrants
On 16 December last year, there was a joint announcement made by
APRA and the Tax Office that investments in instalment warrants
by superannuation funds, in particular SMSFs, would no longer be
allowed from that date.
To clarify, this restriction relates to situations where existing
shares held by a superannuation fund are converted to instalment
warrants to release cash for investment in further assets.
The main issue in this situation is that the existing shares are
used as security for the purchase of the instalment warrants. Superannuation
legislation prohibits the trustees of a complying superannuation
fund from placing a charge over any assets of the fund, which is
why this type of investment is not allowed.
It is important to note that instalment warrants purchased with
cash are still valid investments for superannuation funds, including
SMSFs. However, consideration needs to be given to the investment
strategy of the fund to ensure that this type of investment is appropriate
for the needs of all members.
Any existing arrangements in superannuation funds which are in
breach of the legislation need to be sold or exercised before 16
December 2003.
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Salary
Sacrifice Arrangements
For high income earners in particular, the option to sacrifice
part of your salary into superannuation can be beneficial.
Even where superannuation surcharge is payable, the maximum tax
payable on the superannuation contributions is still only 30%.
In cases where a superannuation fund receives franked dividend
income, the effective tax rate even with the surcharge can often
be a lot lower than 30%. When compared with the highest marginal
tax rate of 48.5% including the Medicare levy, the tax savings can
be significant.
A salary sacrifice arrangement must be entered into before the
salary has been earned. It is recommended that a written agreement
be prepared between the employer and employee, specifying an amount
of future salary to be contributed to superannuation by the employer.
This is an area that the Tax Office will scrutinise. For example,
in a recent case that was decided on 10 January 2003, an employee
requested that accrued long service leave and performance bonuses
due to him on retirement be contributed to his superannuation fund
by his employer, instead of paid as salary.
The problem the Tax Office had in this case was that they believed
these amounts had already been earned at the time the request was
made by the employee. The amounts were therefore considered to be
a redirection of salary and assessable to the employee as such.
If a written agreement had been made in advance of the amounts
being earned then the salary sacrifice arrangement would have been
valid. As long service leave is accrued year by year, it is
difficult to effectively arrange for this amount to be sacrificed
into superannuation.
However, in relation to a performance bonus, if an employee agrees
in writing at the start of a year for any future bonuses to be paid
as superannuation contributions, this would be a valid salary sacrifice
arrangement.
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Super
Choice
The Super Choice legislation continues to rise from the past.
A proposal to provide employees with a choice as to where their
9% superannuation guarantee contributions can be paid, was first
introduced in the 1997/1998 Federal Budget. That proposal
together with subsequent legislation, were unsuccessful in their
passage through parliament.
An amended version of the Superannuation Choice legislation is
currently before parliament with an intended commencement date of
1 July 2004. While there are a number of factors in this version
of the legislation that are likely to lead to it’s demise again
(such as the high administrative burden on employers to name one),
there are significant benefits to employees being provided with
a choice of superannuation fund.
In particular, it should reduce the number of lost superannuation
accounts because employees will be able to nominate a superannuation
fund they already have. This would avoid the creation of new
superannuation fund accounts upon any change of job that may be
lost during transition.
It also opens the door for employees to benefit from using a SMSF
where their circumstances are suitable. This may provide incentive
for some to contribute higher amounts to retirement savings than
they otherwise would have.
Either way, it is anticipated that there will need to be significant
changes to the current form of the legislation if it is to succeed
in it's passage through parliament.
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