YourGuardian: March 2004 edition

Contents

1. Government's proposed changes to superannuation
   • Simplifying the current work tests
   • Compulsory cashing of benefits for people over age 75
   • Preservation of Employer ETPS (Golden Handshakes)
   • Easier access to super upon reaching retirement age
   • Changing the Centrelink assets test exemption for complying pensions
   • Including a new growth pension as a complying pension
   • Actuarial Certificates for Allocated Pensions
2. Binding nominations
3. GST registration for self-managed super funds

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GOVERNMENT'S PROPOSED CHANGES TO SUPERANNUATION

The Treasurer recently released a policy paper outlining proposed changes to improve the superannuation system. Further details regarding the proposal are to be provided in the May Budget. The following is a summary of the main changes proposed.

Simplifying the current work tests - to apply from 1 July 2004

For people under age 65, the proposal is to remove the current work test. Presently, a person under age 65 must have worked at least 10 hours during a week at some time during the last 2 years, before a super contribution can be made by them or their employer. The exception will be for people under 18 years who will still be required to satisfy a work test.

For people aged 65 to 74, there will still be a work test to determine whether they are able to contribute to super, or whether they must draw down on their super if they fail the test. However, instead of the current test whereby a person must be working at least 10 hours in each week, it is proposed that there will be a more relaxed annual work test applicable.

Compulsory cashing of benefits for people over age 75 - to apply from 1 July 2004

It is proposed to change the law so that as soon as a person reaches age 75, they must start drawing down on their super regardless of whether they are working or not. Presently, if a person is still working 30 hours each week once they reach age 75, they can continue to keep their money accumulating within a super fund.

Preservation of Employer ETPS (Golden Handshakes) - to apply from 1 July 2004

If a person receives a taxable payment from their employer upon redundancy or early retirement, they currently have a choice of whether to take the amount in cash now and pay the tax, or roll it over to a super fund. If they choose to roll the amount over, it is still accessible at any time after that. It is often people under age 55 who choose to roll over the amount, to avoid paying tax at up to double the rate that would apply if they wait until they turn 55 to draw the money.

It is proposed that any employer payments that are rolled over to a super fund will need to be preserved until the person reaches their retirement age (being from 55 to 60 years depending on whether they were born before or after 30 June 1964). This is to bring employer payments in line with all other super contributions (including personal contributions) which since 1 July 1999, must be preserved.

Easier access to super upon reaching retirement age - to apply from 1 July 2005

Currently a person under age 65 must either retire or cease employment before they can access their super benefits. It is proposed to allow people access to their super without the need to retire or stop working, when they reach age 55 (or up to age 60 for people born after 30 June 1964). This access to super will only be available by way of a pension though, that cannot be converted to a lump sum later.

Changing the Centrelink assets test exemption for complying pensions - to apply for pensions commenced on or after 20 September 2004

A complying pension is generally one that pays a pre-determined amount of income each year over a person's life expectancy and cannot be converted to a lump sum once it has started (except in very limited circumstances). Complying pensions at the moment are totally excluded from the assets test when determining if a person is eligible to receive the age pension.

The proposal is to make 50% of a complying pension count towards the assets test for pensions commenced after 20 September 2004. This is to reduce the ability of wealthy people being able to obtain the age pension even where they have assets well in excess of the thresholds.

Including a new growth pension as a complying pension - to apply to pensions commenced on or after 20 September 2004

If at least 50% of a person's superannuation is taken as a complying pension, then the benefits taken are measured against the 'Pension RBL' which is around double the amount of the 'Lump Sum RBL'. These 'RBLs' are the amounts up to which a person can draw their super and receive generous tax concessions.

A popular option for a lot of retirees is to take their superannuation in the form of an allocated pension as it provides greater flexibility in that lump sums can still be drawn if required after the pension commences. However allocated pensions are measured against the lump sum RBL, which is approximately half the value of the pension RBL.

The amount of any superannuation benefits exceeding either the lump sum or pension RBL, depending upon which one applies, lose their concessional tax treatment. It is therefore often a trade-off between flexibility and a higher tax cost when a person is deciding which form of pension to take (aside from considering eligibility for the age pension).

The proposed new growth pension will provide another option which will fall somewhere in between one of the current complying pensions and an allocated pension. Whilst a growth pension still won't have the ability to be converted to a lump sum after commencement, the income drawn each year will be linked to the performance of the assets supporting the pension.

The main advantage will be that because the pension will be linked to the performance of the underlying assets, there will be no requirement for the pension to last for a specified time (i.e. when the assets supporting the pension run out then the pension stops).

What this means is that the complexity involved with current complying pensions, in determining how much of the person's superannuation must be set aside to meet the 50% test, will be reduced. It should simply be a case of setting aside at least 50% of the person's superannuation to commence a growth pension, to obtain the benefit of the higher pension RBL.

Actuarial Certificates for Allocated Pensions - not required from the 2004/2005 financial year

The proposal is to remove the current requirement for a super fund to obtain a certificate from an actuary every 3 years where the fund is paying an allocated pension. This certificate is required so that an actuary can confirm that there are enough assets in the fund to pay out the pension that has been set up. If this is done then the super fund does not pay any tax on income earned on those assets.

BINDING NOMINATIONS

When becoming a member of a self managed super fund, the member will need to complete a form to nominate the beneficiaries that should receive the balance of their superannuation when the member dies. This nomination form can either be made as binding on the trustees or non-binding.

If a binding nomination is made it means that the trustee(s), including the executor for the member who dies, must pay out the benefits exactly as specified on the nomination form. To be binding on the trustees, the nomination form must clearly specify how and to whom the benefits are to be paid, and must also be signed in front of 2 adult witnesses.

A non-binding nomination simply means that it is a guide to the trustees as to how the member wishes their superannuation to be paid when they die however it does not have to be followed as specified. The main advantage with this type of nomination is that it provides maximum flexibility and enables the trustees and/or executor to choose the most tax effective method for paying out the member's superannuation upon death.

A point to note in relation to a non-binding nomination is that with a self-managed superannuation fund it is often a husband and wife who are members and trustees of the fund therefore if one of them dies, it will be up to the other member (together with the executor for the deceased person) to decide how the money should be paid. If both die at the same time then it will be up to the executors for both members to decide how to pay out the superannuation benefits.

Binding nominations stand alone and are separate to a person's will, however effectively carry the same weight as a will does. The following is a summary of some of the issues that should be considered in deciding whether a nomination of beneficiaries should be binding or non-binding on the trustees:

• The Trust Deed for the super fund must allow binding nominations.
• A binding nomination expires after 3 years, therefore needs to be updated every 3 years. They should also be reviewed each year in case circumstances change in relation to the member or their dependants.
• Binding nominations are generally only recommended where there is a need to specify beneficiaries, such as where a member has doubts that the intended people will receive the money upon their death (i.e. where members of the fund have children from a prior marriage, dependants who may be gamblers/bankrupt, or where there are members who have remarried etc).
• Before making a binding nomination it is recommended that you seek assistance from the lawyer who has prepared your will and ensure your will and person nominated as executor for your will are up to date.
• One disadvantage of a binding nomination is that you lose flexibility in how death benefits are paid out, and tax circumstances of beneficiaries may change from the time a nomination is made to the time of a member's death.
• Binding nominations can only be made to dependants (i.e. spouse, ex-spouse or children of any age) or directly to the member's estate.
• People often think that the easiest way out is to nominate their estate to receive their benefits upon death so that their superannuation is dealt with on the same basis as all other property under their will. The main problem with this though is that the super benefits are then incorporated into the estate. One of the main advantages of super is that it can be dealt with separately from the estate without the need to wait for probate.
• Another disadvantage with nominating your estate to receive your superannuation upon death is that the death benefits may not be as tax effective if paid from the estate rather than direct from the super fund unless the will is carefully drafted to take this into account.

Based on the above, the decision on how the nomination of beneficiaries form is completed should be considered carefully and legal advice should be obtained where possible, particularly if you wish to make the nomination of beneficiaries binding upon the trustees.

GST REGISTRATION FOR SELF-MANAGED SUPER FUNDS

The main activity of a super fund is providing financial services to its members in the form of superannuation savings. Therefore most money received by the fund as a result of this service is not subject to GST (eg super contributions, dividends received, interest received etc). The main exception to this is where the super fund owns a commercial property as an investment and then rents the property to a business, in which case the rent is subject to GST.

A super fund however will make purchases in relation to the service it provides to members, upon which GST will often be payable (eg administration services, brokerage on share purchases, tax return preparation etc). If the fund is registered for GST it may be entitled to claim back GST on some purchases.

For example, for any purchases relating to the ongoing administration of the fund, 75% of the GST may be claimed as a credit. For GST on purchases relating to a commercial property, such as repairs and maintenance, 100% may be claimed as a credit. GST payable on services such as tax advice and auditing of the fund are not claimable at all.

A super fund will only be required to register for GST where taxable supplies, such as rent on a business property, exceed $50,000. This is important to note because often it will not be worth registering a super fund for GST unless required, because the costs associated with preparing quarterly BAS usually exceed the GST credits that are able to be claimed.

When setting up a new super fund the trustees must apply for an ABN. In the early stages of the New Tax System, many people thought that to obtain an ABN, a super fund also needed to register for GST, which is not the case. As a result many funds have registered for GST unnecessarily and may be faced with additional administration costs as a result.

It is possible for the trustees to cancel the GST registration for a super fund if they consider that they do not need to be registered on the basis that total taxable supplies for the fund are less than $50,000 per year (as explained above). The following is a summary of the steps to cancel a GST registration:

• Calculate any adjustments required for the last BAS. This involves looking at the assets on hand immediately before the proposed cancellation date and calculating the lesser of:
  • the amount of GST claimed on the original purchase of the asset, or
  • 1/11 of the market value of the asset at that time.
  This amount will then need to be included on the final BAS as GST payable to the Tax Office (i.e. you need to repay the GST that you originally claimed upon purchase of the asset).
• Complete and lodge the final BAS for the super fund up to the cancellation date.
• Complete and lodge the necessary cancellation form, available from the Tax Office website.

Based on the above, we recommend that trustees review the circumstances for their own super fund and decide whether it is necessary to keep the fund registered for GST or not.