Post Budget Update 2009

1. Post Budget Update 2009 Simone Collins BT Financial Group October 2009

2. Overview • Post Budget wrap-up • Personal tax deductions • Income test changes • Regulatory reviews

3. Post Budget 2009 – wrap-up Legislation has passed: • Reduction in Concessional contributions cap • 50% min pension reduction • Co-contributions reduction in matching rate Legislation has not passed: • Private Health Rebate means testing

4. Post Budget 2009 – wrap-up Reduction of Concessional Contributions Caps • From 1July 2009: • concessional contributions cap reduced to $25,000 • transitional cap reduced to $50,000 for 3 years (age 50+) *Under old cap rules these were due to increase (based on AWOTE) on 1 July 2009

5. Post Budget 2009 – wrap-up Concession contributions cap reduction – Impacts • What strategies are impacted by this change: • Above SG employer voluntary contributions • i.e. Insurance arrangements • Salary Sacrifice arrangements already in place - review • TTR strategies

6. Superannuation guarantee contributions Maximum contributions base will usually limit contribution amounts $40,170 per quarter (or $160,680 pa) for 2009/10 SG payable on maximum base - $14,461 pa SG arrangements should only cause an issue where salary sacrifice arrangement takes them in excess of the cap, or: employer makes contributions in excess of base (ie. automatically makes 9%); or employee has multiple employers (e.g. doctors employed by several hospitals) Post Budget 2009 – wrap-up 6

7. Salary sacrifice Take care with Sal Sac – only a small amount may see some clients breach the cap! Superannuation guarantee is included in the caps Consider the timing of contributions (especially employer contributions) Be conscious of the effect of variable income such as bonuses More important than ever to start salary sacrificing earlier Non-concessional contributions to plug savings gap??? Post Budget 2009 – wrap-up 7

8. Post Budget 2009 – wrap-up 50% Reduction in the Minimum Pension payment • 50% reduction in minimum annual payment amounts will extend to the 2009/10 financial year • Applies to account-based, allocated and market-linked (term allocated) pensions and annuities • Why extended to this year? • “assist recovery from capital losses from Global recession” • Maybe because relief came too late last financial year!

9. Post Budget 2009 – wrap-up Concessional contributions cap reduction – Impact on TTR strategies • No specific change to TTR income streams • NO IMPACT if annual CCs are less then $50,000 • If CCs are greater then $50,000 advisers will need to review their clients’ TTR strategies to re-optimise post 1 July 2009 • This may involve: • Reducing the amount of their salary sacrifice and income from their TTR pension • Rolling some of their TTR pension back into accumulation phase

10. Transition to Retirement • Case Study – Vin55-59 - Reduce contributions versus excess concessional contributions tax

11. Transition to Retirement

12. Transition to Retirement

13. Transition to Retirement

14. Transition to Retirement

15. Transition to Retirement Reducing concessional contributions? • Reducing Income Drawn from TTR Pension • reduce their pension income to the minimum pension; • if minimum pension = surplus income, options include: • using 50% reduction in minimum pensions for 2009/10; • rolling money from the TTR pension back to super; or • contributing surplus income to super as an after tax (non-concessional) contribution

16. Transition to Retirement – under 60

17. Transition to Retirement – under 60

18. Transition to Retirement – under 60

19. Do the calculations Warning: • It is important to do individual calculations for all clients utilising a TTR and salary sacrifice strategy. It is also important to regularly review the strategy as a minor change in circumstances may change the preferred course of action. For example: • If Karen’s TTR pension had a tax-free proportion of 100% (ie all tax-free components) the difference between the first and third options above is likely to be minimal. • Based on our projections rolling a portion of TTR pension balance back to accumulation super is the preferred option for Karen once the transitional contributions cap comes to an end on 30 June 2012, and whilst she is aged less than 60 years of age. • Again, based on our projections, once Karen turns 60, her best option is to consolidate her superannuation and TTR pension into a new TTR pension. She should then make after tax contributions to superannuation surplus with income once her concessional cap is reached.

20. Transition to Retirement – 60 plus

21. Transition to Retirement • Conclusions • No hard and fast rules, but generally should look at: • keeping concessional contributions below the concessional cap and • utilising the 50% reduction in minimum pension payments • Need to look at each client’s circumstances • Need to do the calculations for each client, each year • Differences between those 60 and over and those under 60

22. Claiming a tax deduction for personal super contributions (2008/09) Recent audit activity by the Australian Taxation Office (ATO) “has identified a high rate of incorrect claims for deductions of personal contributions in 2008 tax returns. Many of the incorrect claims are attributable to a failure to consider the new legislative requirements” that commenced on 1 July 2007. Source: ATO Publication: eLink 14/09 • References: • Draft Taxation Ruling 2009/D3 • ATO doc: Claiming deductions for personal super contributions • BT Technical Bulletins: • Contributions: Tax deductions for personal contributions to superannuation – 2008/09 • Contributions: Tax deductions for personal super contributions – 2009/10

23. Claiming a tax deduction… How to ….. • be eligible to make a personal contribution to superannuation; • make the contribution for the right reasons; • ensure the super fund receives the contribution no later than 30 June of the financial year (for 2008/09 this is 30 June 2009); • be an eligible person for the purposes of claiming a deduction; and • follow the correct process to claim a deduction.

24. Claiming a tax deduction…2008/09 Eligible person includes: • self employed persons; • substantially self employed persons (less than 10% of a person’s assessable income and reportable fringe benefits are attributable to employment as an employee for the financial year); and • persons who are not deriving income from an employer. This continues to include anyone who is not employed and aged 18 to 64. Those under 18 at the end of the financial year cannot claim a tax deduction unless they earned income as an employee or business operator in that financial year.

25. Claiming a tax deduction…2008/09 Follow the correct process: • Submit Notice to the fund before the earliest of 30 June 2010 and the date: • they lodge their tax return for the 2008/09 year (year in which the contribution was made); • they cease to be a member of the fund; • the super fund trustee no longer holds the contributions (eg if a large rollover or cash withdrawal has been made); • the super fund trustee begins to pay an income stream based in whole or part on the contribution; or • the super fund trustee is provided with a request from the member to split contributions with their spouse.

26. Claiming a tax deduction… 2009/10 tax deduction rule changes Further change to 10% test: • less than 10% of assessable income + reportable fringe benefits +Reportable Employer Superannuation Contributions (RESC) attributable to employment which would result in the person being treated as an employee for SG purposes. Reference: BT Technical Bulletin - Contributions: Tax deductions for personal super contributions – 2009/10

27. Changes to income tests • The changes • New definitions and concepts • Changes to certain income tests

28. Changes to income tests • All changes apply from 1 July 2009 • Income tests used to determine eligibility for a range of Government support payments and tax offsets will be expanded to include: • certain contributions to superannuation; and • total net investment losses • No change to income thresholds or calculation of assessable and taxable income • Moving away from taxable income as the income base

29. New definitions and concepts The following new concepts and definitions will apply to certain Government support payments and tax offsets from 1 July 2009: • Reportable super contributions • Reportable employer super contributions • Total net investment loss • Adjusted fringe benefits total • Income for surcharge purposes • Rebate income • BT Technical Bulletin:Income test Reforms

30. Reportable super contributions Reportable superannuation contributions (RSC) • reportable employer superannuation contributions (RESC) + personal deductible superannuation contributions Reportable employer superannuation contributions (RESC) • generally salary sacrifice contributions • more specifically, all employer contributions the employee could have chosen to receive as salary and wages rather than superannuation contributions • excludes super guarantee (SG) contributions and mandated employer contributions

31. Reportable employer super contributions • If an employer makes contributions that exceed their SG or mandated contribution requirements, but the employee was unable to influence the amount of the excess, then the excess will generally not be considered RESC. For example: • excess contributions are made because of the employer’s payroll system limitations (ie payroll system calculates 9% SG amount on all earnings not just ordinary time earnings); or • excess contributions are made under an industrial agreement, and the employee had no involvement in the preparation of the agreement, aside from voting on it.

32. Total net investment loss Total net investment loss • net losses (gross income less allowable deductions) on all financial investments* and rental property • replaces the current concept of ‘net rental property losses’ • an individual will have a total net investment loss for an income year if their deductions from financial investments and rental property exceed their gross income from those investments. • effectively means tax losses are added back to taxable income *A financial investment is defined to include: • shares • an interest in a managed investment scheme • a forestry interest in a forestry managed investment scheme • rights and options in relation to the above investments • an investment of something of a “like nature” to any of the above

33. Adjusted fringe benefits total Adjusted fringe benefits total • reportable fringe benefits total x (1 – FBT rate) • The amount that will appear on payment summaries will be the amount of the fringe benefit (excluding fringe benefits tax) • Only total amounts over $2,000 per employee will appear on payment summaries. To calculate whether or not an employee has reached the $2,000 threshold, fringe benefits tax payable on each benefit needs to be included.

34. Income for surcharge purposes Income for surcharge purposes • taxable income (there is a qualification in relation to amounts subject to family trust distribution tax); • reportable fringe benefits total (if any); • reportable superannuation contributions (RESC and personal deductible contributions); and • total net investment loss • doesn’t include amounts withdrawn from super to which the low rate cap amount ($150,000 for 2009/10) has been applied • will be used to determine an individual’s Medicare Levy surcharge liability from 1 July 2009

35. Rebate income Rebate income • taxable income; • reportable superannuation contributions (RESC and personal deductible contributions); • total net investment loss; and • adjusted fringe benefits total • will be used to determine an individual’s eligibility for SATO, pensioner tax offset and trustee offset from 1 July 2009

36. Changes to income tests Deduction for personal superannuation contributions • Current test: less than 10% of assessable income and reportable fringe benefits is attributable to activities that resulted in the individual being treated as an employee* • New test (from 1 July 2009): less than 10% of assessable income, reportable fringe benefits and RESC is attributable to activities that resulted in the individual being treated as an employee* * as defined in the Superannuation Guarantee (Administration) Act 1992

37. Jack’s earnings in 2008/09: Salary $ 5,000 SG contributions $ 540 Salary sacrifice contributions (RESC) $ 7,000 Reportable fringe benefits (RFB) $ 1,000 Freelance income $70,000 Example: Impact of the inclusion of RESC Jack, age 45, largely works freelance but is employed one to two days a week with a professional photography studio. • Does Jack meet the 10% test in 2008/09? Total assessable income + RFB = $76,000 Assessable income + RFB attributable to employment as employee = $6,000 $6,000 / $76,000 = 7.89% Jack is able to contribute to superannuation and claim a personal tax deduction

38. Jack’s earnings in 2009/10: Salary $ 5,000 SG contributions $ 540 Salary sacrifice contributions (RESC) $ 7,000 Reportable fringe benefits (RFB) $ 1,000 Freelance income $70,000 Example: Impact of the inclusion of RESC Assume Jack’s earnings are identical in 2009/10 • Does Jack meet the 10% test in 2009/10? Total assessable income + RFB + RESC = $83,000 Assessable income + RFB + RESC attributable to employment as employee = $13,000 $13,000 / $83,000 = 15.66% Jack is ineligible to claim a tax deduction for any personal contributions made to superannuation

39. Changes to income tests Government superannuation co-contributions • Current test: assessable income and reportable fringe benefits is less than the upper co-contribution threshold ($60,342 for 2008/09) • New test (from 1 July 2009): assessable income, reportable fringe benefits and RESC less than the upper co-contribution threshold ($61,920 for 2009/10)

40. Example: Impact of the inclusion of RESC Heather, aged 50, is a psychologist and works three days per week at a private hospital • Heather’s earnings in 2008/09: Cash salary $28,000 SG contributions $ 5,850 Salary sacrifice contributions (RESC) $37,000 Personal super contributions $ 1,000 Reportable fringe benefits (RFB) $ 2,000 • What is Heather’s co-contribution entitlement in 2008/09? Assessable income + RFB = $30,000 ($28,000 + 2,000) Heather will receive a Government co-contribution of $1,500 ($1,000 x 1.50) as her total income of $30,000 is less than the lower threshold of $30,342.

41. Example: Impact of the inclusion of RESC Assume Heather’s earnings and super contributions are identical in 2009/10 • Heather’s earnings in 2009/10: Cash salary $28,000 SG contributions $ 5,850 Salary sacrifice contributions (RESC) $37,000 Personal super contributions $ 1,000 Reportable fringe benefits (RFB) $ 2,000 • What is Heather’s co-contribution entitlement in 2009/10? Assessable income + RFB + RESC = $67,000 ($28,000 + 2,000 + $37,000) Heather will not receive any Government co-contribution as her total income of $67,000 is above the upper threshold of $61,920*. * 2009/10 upper co-contribution threshold used in this example.

42. Henry Review report on the retirement income system • Government released Budget night • The Panel confirmed: • Current three pillar architecture should be maintained • Means tested age pension • Compulsory superannuation (SG) • Voluntary savings (Salary sacrifice and personal contributions) • Recommendations adopted in the Federal Budget: • No change to the current 9% SG • Increase the age pension age gradually to age 67 • Increasing the equity of the system by decreasing the tax concession to high income earners by halving the concessional contribution cap • Treating employment income differently from other income to encourage workforce participation by age pensioners

43. Henry Review report on the retirement income system The Government will wait for the final report in December 2009 to review the other panel recommendations: • Increasing the preservation age to match the age pension age. • Amending the pension means tests, possibly through a single test, and improve incentives to work beyond retirement age • Possible further changes to the tax treatment of savings and investments (including superannuation)

44. Henry Review report on the retirement income system Recommendations continued….. • Improving the ability of people to use their superannuation to manage longevity risk (Eg. Lifetime annuity products, voluntary/compulsory longevity insurance) • Improving the awareness and engagement of individuals with the retirement income system • Improving the tax advantages of superannuation for low income earners • Possibly limiting the asset test exemption on the family home

45. Superannuation Reform • Henry Tax Review • Preliminary: Retirement incomes reported May 2009 • Major review reports Dec 2009 • Cooper review (Operational review of Super) • Three tiered phases: Governance, Operation and Efficiency and Structure • New superannuation minister • The Hon. Chris Bowen MP replaces Nick Sherry and promoted to cabinet • Other: • Clearing houses and Lost members • APRA – Superannuation statistics • Long term returns • Award modernisation • ASIC relief on limited advice • IFSA draft charter • PJC Inquiry (Ripoll) • Margin Lending

46. Where to from here? • Await report back of various reforms • BT Technical on the Wrap desktop • TechWrap - early each month • Tech Bulletins and strategy papers

47. Disclaimer The information contained in this presentation is current as at 9 October 2009. This presentation has been prepared and given in good faith based on laws current at this date and our interpretation of them and, where applicable, represents a summary of a regulator’s current views or statements which do not necessarily represent the views of the Westpac Group, BT Financial Group, nor any of their employees or directors. This presentation is intended as general information only and should not be considered a comprehensive statement on any matter (including taxation issues) and should not be relied upon as such. The information in this presentation has been prepared without taking into account any individual objectives, financial situation or needs. No member of the Westpac Group, BT Financial Group, nor any of their employees or directors gives any warranty of accuracy or reliability nor accepts any liability in any other way including by reason of negligence for any errors or omissions contained in the presentation, to the extent permitted by law. This presentation is for use only by internal BTFG staff as general information and should not be handed or distributed to any other person, including customers of the Westpac Group or BT Financial Group. This presentation may not be used or reproduced without the prior consent of BT Financial Group.