AMA Analysis

The Treasurer announced in the 2006 federal budget major changes to the superannuation   system.  He proposed that there be no tax on superannuation benefits taken in any form by people aged 60 and over, plus other changes designed to encourage more contributions from younger people and increase flexibility for older people.  Subject to consultation and the necessary legislation, the proposals will come into effect on 1 July 2007.

The Treasury has established a website - simplersuper.treasury.gov.au - on which it has published a paper titled A Plan to Simplify and Streamline Superannuation and invited submissions by 9 August 2006.  The AMA has made a submission.

Main Points

Abolition of the contributions surcharge from 1 July 2005 was a welcome move. These proposed changes address the benefits end of the superannuation system and seem to be beneficial for everyone.  There are no losers.  That is certainly the view of commentators and the Association of Superannuation Funds of Australia (ASFA).   

These are the main points:
• no tax from 1 July 2007 on benefits drawn down from taxed superannuation funds by people aged 60 and over, whether taken as a lump sum or an income stream:
- untaxed superannuation payments will not be declared in tax returns;
- pension and annuity rules to be loosened to enable wider range of products;
• no Reasonable Benefit Limits (RBLs);
• limited tax offset for people over 60 receiving pensions from untaxed superannuation funds (mainly government schemes) in a bid to level the tax field;
• contributions tax of 15% remains;
• age-based restrictions on deductible employer (or self-employed) contributions replaced by a universal limit of $50,000 per year:
- better for people under 50, while those over 50 will retain their $100,000 limit for 5 years to 2012 as a transitional measure;
• self-employed can claim a full deduction on their contributions up to the $50,000 limit:
- now limited to first $5,000 and 75% of the balance;
• no requirement to draw superannuation benefits from age 70 (or age 65 if not working sufficient hours);
• deductible contributions can continue up to age 75;
• post-tax contributions capped at $150,000 per year as a counter to the scrapping of RBLs and removal of benefits tax after age 60:
- this measure applies from budget night 2006 and could catch out people who sold a business to fund their retirement under the old rules where there were no limits;
-     the cap can be averaged over 3 years, to enable a one-off payment of $450,000, plus the Treasurer’s office announced that a further $150,000 contribution could be made in the period between budget night and 30 June 2006.

These are the main points.  The Government’s paper also refers to more generous rules for the pension assets test and eligibility of the self-employed for the Government’s co-contribution for low income earners.  

The Government claims that this proposal delivers more benefits to more people than would a change to contributions tax.  They don’t say much about why this is so.  They make two other points about the package:
1. administration of superannuation funds will be simplified and streamlined to the point where fees and charges to members will be reduced over time (not disputed by the superannuation funds);
2. most people nearing retirement will not need to consult a financial planner and will thus save $3,000 to $10,000.

What’s Good for Doctors?

Tax and RBLs:  The scrapping of tax on superannuation benefits from age 60 is good for everybody.  For doctors, the same goes for removal of RBLs. 

Staying on: One of the Government’s aims is to encourage older people to remain in the workforce because they will be able to draw superannuation benefits without large tax losses. The AMA has supported proposals to enable this to happen.  Many doctors should be able to continue working part-time while being able to draw a superannuation benefit and without punitive taxes. 

Staying on longer:  Traditionally many doctors have remained at least part-time in the workforce well past the standard retirement age. Having the option of leaving their superannuation alone after age 70, and without having to pass a “work test” after age 65, will be welcomed by some doctors.  So will the ability to continue making deductible contributions up to age 75.

Deductible contributions: The new limit of $50,000 on deductible contributions is designed to encourage more superannuation contributions from an earlier age. Currently the limits are $14,603 for those aged >35, $40,560 for people aged 35-49 years and $100,587 for age 50 and over. This is good for any doctors aged less than 50, whether salaried or self-employed, who want to maximise their superannuation contributions.

Self-employed:  Making all self-employed contributions deductible (up to the universal limit) is good for doctors who are in private practice or otherwise meet the definition of “self-employed”.

Government pensions: Doctors on pensions from unfunded government superannuation schemes will receive a limited tax offset designed to even things up. How the Treasury worked this out is not clear, but any tax reduction is good.

Most doctors presumably would not be affected by changes to the pensions assets test or the co-contribution for low income earners (up to $49,000). However, there would be an increasing number of doctors who have worked part-time for large parts of their careers or have spent lengthy periods out of the workforce or who have a spouse or partner on a low income.  These items could be beneficial for a significant number of doctors, especially in future years, given the changing demographics of the medical workforce. 

What’s Bad or Missing?

Overall this is a good package.  Most of the experts believe there are no losers.
Potentially doctors aged 50 or more are disadvantaged, in that the deductible limit decreases. However, the transitional measure of retaining a $100,000 limit for 5 years should enable most people to organise their affairs to take advantage of the new superannuation system.

Post-tax contributions

The new limits on post-tax contributions potentially disadvantage doctors who sell off major assets and put the proceeds into superannuation to fund their retirement, especially since the new limit applied from 10 May 2006 rather than 1 July 2007.  This was the point raised by a  financial planner who wrote to the AMA on this subject and suggested the entire package was bad because of this aspect.

I think most people would acknowledge that the Government had to do something to avoid contrived tax avoidance by wealthy individuals. That said, the original proposal could have been very bad for some individuals. The transitional measures subsequently announced  should have enabled financial planners to avoid major problems for many people who were caught by the budget announcement just on the point of transferring major funds into superannuation, but it may still be a genuine problem and disadvantage for a few.

The financial planner was asserting that doctors would have little in superannuation funds and would have to rely on major one-off capital gain from selling their practices to fund their retirement.  I doubt if this is so. If any doctors are affected anywhere near as badly as this person suggested, the number would be very small. Most of his other points seemed to reflect annoyance at the Government’s announcement that most people nearing retirement will save $3,000 to $10,000 by not having to see a financial planner.

The 10% Rule

The AMA has found that many VMOs receive more than 10% of their total income from their work in the public hospital system. Under current rules, this puts them outside the definition of “self-employed” so they cannot claim tax deductions for their personal superannuation contributions. 

The Australian  Society of Anaesthetists (ASA) has written to the AMA about this problem, pointing out that it constitutes a serious disincentive for VMO Anaesthetists to work in the public system and asking the AMA to lobby for change to the federal tax legislation.  The NSW AMA has been pursuing with NSW Health a salary sacrifice arrangement that would solve the problem for VMOs in NSW, but it has become evident that the same problem affects other VMO specialties and other States.

Advice from the Treasurer’s office indicates that this problem has not been addressed in the Treasury plan. In fact, I assume it would be worse for many VMOs (viz those under 50) because they would be prevented from claiming a tax deduction for a significantly increased limit of contributions.  This matter clearly needs to be addressed.

Conclusion

Overall the package is a good one, with considerable benefits for doctors. 

The AMA has lodged a submission saying that the AMA supports the overall package of superannuation changes, but requesting a change to the 10% rule on equity grounds and to prevent VMO specialists limiting their services to public hospitals or dropping out of the public system altogether.

Mick Saunders
Senior Policy Adviser
Workplace Policy Department           9 August 2006