The announced changes to superannuation laws on May 9 and the subsequent clarification on September 5 have created an imperative for action that the financial planning profession can respond to and hence benefit from the enormous opportunity to build our businesses.
The proposals are yet to be legislated but the Government’s intention is to introduce the final legislation before Christmas.
Superannuation is now so superior in its attractiveness as a structure that it will be irresistible and billions of dollars of additional inflows are likely. Those practices positioned to respond to this demand have the potential to set themselves up for a dramatic increase in business.
There were more than 1,500 submissions made to the Government on how to finetune its budget proposals by the August 9 deadline and on September 5 the Government released a paper detailing its consideration of those proposals.
The major concession was that subject to any applicable work test, people will be able to make up to $1 million capital contributions to super up until July 1, 2007. This will allow those who may have been selling their business, investments or farm in order to make an undeducted contribution to super, to do so and not be disadvantaged. Originally the Government said it could only be $150,000 a year and then $450,000 every three years. The $150,000 annual limit on post-tax contributions will now commence from July 1, 2007.
The opportunity for planners to advise on this is immense. A couple with a high net worth have the ability to make additional contributions of $1 million each plus the $450,000 each for the next three years in advance. This amounts to a combined contribution of $2.9 million and there is this limited window of opportunity that will be their call to action.
In addition to the annual cap, people can contribute a lifetime limit of $1 million from the sale of small business assets that have been held for 15 years and settlements from injuries resulting in permanent disability. The contribution cap of $50,000 will be indexed in line with increases in average weekly ordinary time earnings (AWOTE) in increments of $5,000. The transitional cap of $100,000 for those aged 50 and over will not be indexed. They will have transitional arrangements for employer eligible termination payments that have been stipulated in existing employment contracts as long as they are paid by July 1, 2012.
Invalidity benefits that are tax effective will be extended to the self-employed as well. Those aged 65 and over will be restricted to contributing $150,000 undeducted contributions per financial year provided they satisfy the work test, which is that you must work 40 hours in 30 consecutive days in the year in which the contribution is made. There will be no further contributions allowed from age 75.
There is still a problem that arises with death benefits that are paid from a superannuation fund. The Government will allow a pension to be paid to a dependent child, however, when the child turns 25 the account balance must be paid as a tax-free lump sum to the child unless the child is permanently disabled. A pension cannot revert to a non-dependant on death. Therefore, non-dependant beneficiaries will only be able to receive a lump sum upon death.
The Government has increased the threshold that will receive concessional tax treatment from an untaxed superannuation fund. It has increased from $700,000 to $1 million. The $1 million is applied on a lifetime basis to each member of the fund. The threshold will be indexed to AWOTE in increments of $5,000. This is particularly pertinent to many members of government funds.
One interesting aspect that hasn’t been amended after consultation is the inability to commute complying income streams. The Government will not permit the commutation of complying income streams that had been established under the existing regime for reasonable benefit limits or social security reasons.
I think there has been some lobbying by the big life insurance companies and there will be some very annoyed term allocated pension holders. When you combine these amendments with the abolition of the RBL regime and the benefits of transition to retirement strategies, there is an unprecedented opportunity to assist investors to take advantages of these proposals over the next nine months.
It is a window of opportunity that can’t be missed. This opportunity will go to those practices that are properly organised to go to their client base and systematically explain the benefits as they relate to each individual client. It is a great opportunity to ask for referrals and to demonstrate the value of advice. The 2007 financial year looks like being a bumper year.
