There have been unprecedented increases in Government spending recently in efforts to lessen the economic consequences of the global recession. Some of us old enough to remember have seen situations like this before. But as at most restaurants, even if the bill remains unpaid by the current diners, there is no such thing as a free lunch—someone eventually wears the cost!
There is much speculation as to Treasury Secretary Ken Henry’s tax review and the possible recommendations that may be carried through to the May Federal Budget. One thing that is obvious is that there is lobbying in the community and media to remove or reduce various tax concessions applicable to superannuation and Australian share investments. The lobbyists feel that the available tax breaks are unduly advantaging the so-called rich or self-funded retirees. It is a difficult task for Government to adequately fund care for those who, through no fault of their own, are less well-off in society than most others. However, the real challenge is to balance this funding by positioning the pivot, so that there is enough incentive for people to work hard and save. Otherwise, they too may become an unnecessary social burden in their latter years. Without sufficient incentives, the assumption that high-income earners will always be likely to save more to provide for themselves in retirement may be somewhat misguided.
Many changes to take place after 1 July have already been passed in Parliament as a result of the May 2008 Federal Budget. The treatment of income for the purposes of Government rebates, benefits such as the Government co-contribution to super and the Commonwealth Seniors Health Card (CSHC) tests will now add back salary sacrificed contributions to super. Until 1 July 2009, salary sacrifice to super could allow you to reduce your assessable income so that you could gain a low income rebate of up to $1,200, a mature age rebate (if over age 55 and working) of up to $500 and, if you qualified and made a $1,000 after-tax contribution to super, a Government co-contribution of up to $1,500. The total benefits possible through the reduction in assessable income by salary sacrifice, other than the obvious tax savings, amounted to $3,200. Many super industry observers saw this as providing an unfair advantage to those able to salary sacrifice to that level and the door will close after 1 July 2009.
It has been mooted that new Transition to Retirement pension arrangements, which allow people over age 55 to draw on their super at the same time as salary sacrificing into super and gaining tax savings, may also be disallowed. The opportunity may stop either after the Budget or from 1 July 2009. Although ‘transitioners’ can only draw annual super pension income of up to 10% of the capital held in pension phase, this income is normally given a 15% tax rebate for those aged between 55–60 and from age 60 is usually completely tax exempt. No lump sum commutations are allowed.
The legislation was originally designed to allow workers the option of staying in the workforce, perhaps part-time and supplementing living costs using accumulated superannuation. The strategy, initially proposed to assist people to reduce their working hours as they approach retirement, was extended to many full-time employees and this extension was not disallowed by the ATO. This strategy is at present considered a legitimate means of making tax savings and increasing retirement benefits without attracting the anti-avoidance provisions of the tax legislation. Whether the arrangements will still be available in their existing format after budget night is anyone’s guess.
If the rumours are correct, then it may be a disappearing opportunity. Given that changes are usually not made retrospectively, arrangements already in existence may be allowed to continue. For the over sixties, still working full-time and with a reasonable amount of accumulated super, the arguments in favour of using tax-free income to live and increasing salary sacrifice for future savings, can be very convincing. If you are over 55 and think the strategy could still provide value, given the now legislated changes to the treatment of salary sacrifice to super after 1 July 2009, then hurry. Consider a personalised assessment by a licensed financial adviser, as arrangements would probably need to be in place by the 12 May 2009 if the rumours come to pass.
For self-funded retirees, entitlement to the CSHC will also probably change under a new definition of income. The old test was based simply on annual taxable income, as long as it was below $80,000 for couples and $50,000 for singles. From 1 July 2009, it is proposed that pension payments from allocated pensions be counted as income for the purposes of the CSHC, but surprisingly, so will lump sum commutations or cash outs. Many self-funded retirees, who do not qualify for Centrelink benefits, have been able to defray pharmaceutical and healthcare costs using this card. Although announced in the 2008 Federal Budget, unfortunately, many self-funded retirees may only become aware of the allocated pension income treatment changes for the purposes of the card, when they lose their entitlement after 1 July 2009!
Disclaimer: This superannuation article is for general information only. It does not take into account your personal objectives, financial situation or needs. As a result, you should consider its appropriateness to your own situation and obtain independent financial advice before making any decisions about your superannuation.
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