In his budget speech the Treasurer outlined proposed changes to the way in which superannuation benefits will be able to be accessed and provided that those benefits are paid from a Taxed Fund and the recipient is aged 60 years or older, no tax will be payable. Most of the detailed information available on these proposals relates to private superannuation and pension schemes; not the DFRB or DFRDB schemes.

Currently contributions by members of private superannuation funds/schemes are taxed at 15% on entry and the Superannuation Fund pays a 15% tax on the earnings and when a benefit is drawn down by a recipient it is concessional tax at 15%. What the Treasurer has proposed in the Budget is that, provided you are aged 60 years or over, there will be no restriction on how you take your superannuation benefit, lump sum, pension or a bit of both, or on the amount you take and all benefits will be tax free. Also Reasonable Benefits Limits (RBL) will be abolished.

These proposals, if not amended, will come into force 01 July 2007.

Information on how these proposals will affect retired pay paid under either the DFRB or DFRDB scheme is a little scarce; mostly the information that is available relates to Public Service pension schemes and benefits. The DFRB and DFRDB schemes are similar in structure to Public Service superannuation schemes and are listed in the Treasury papers as Untaxed Schemes. Though there are some significant differences between the schemes they are not important at this stage of the superannuation journey. The VLSVA Qld will be making a submission on certain aspects of the Treasurer’s proposals and will in that submission point out these differences.

Information from Treasury papers and the office the Hon Peter Dutton, MP, Minister for Revenue and Assistant Treasurer suggests that DFRB and DFRBD recipients should receive a substantial tax break on their retired pay.

The relevant paragraphs in the Treasury papers are as follows:

Untaxed Schemes

In some superannuation schemes no employer contributions are made until a benefit becomes payable and no contribution or earnings tax is paid. These arrangements are primarily restricted to employees in the public sector such as public servants, with the majority of these funds closed to new members. These benefits would be treated as follows:

§ As no tax has been paid on either contributions or earnings, superannuation benefits from these funds have traditionally had a higher tax rate on withdrawal (eg pensions are taxed at marginal tax rates with no 15% rebate).

§ For equity reasons, for people aged 60 and over, lump sum benefits from an untaxed scheme would be taxed at 15% up to $700,000 and at the top marginal tax rate thereafter. Pensions would be taxed at marginal tax rates but would receive a 10% rebate of the total taxable part of the pension as an offset. This would ensure a similar tax treatment between benefits paid from taxed and untaxed funds.

This is the best information currently available and the consensus of a number of knowledgeable persons concerning DFRB and DFRDB matters is as follows:

§ For those DFRDB members (contributors) currently contemplating separation from the ADF they should consider delaying those plans until after 01 July 2007. At present, commutation is added to assessable income and taxed at the member’s marginal rate which would be at 30% or 42%, depending on your salary at separation. However, after 01 July 2007 all commutation will be taxed at only 15%, a considerable saving. Think about your immediate future as serious money is at stake if you make a rash decision.

§ The example below is what is believed to be the basic tax break available for a DFRB or DFBDB recipient with a retired pay of $30,000 per annum. The amount of $30,000 is considered an average and no other income or deductions have been allowed for as the income particulars of each individual is likely to be different. Here is the example:


DFRB or DFRDB retired pay - $30,000pa

Current tax on $30,000 - $5,172pa

Tax after 01 July 2006 - $4,348pa

Tax benefit (New tax scales) - $ 824pa


10% of total taxable part of

DFRDB pension as an offset - $3,000

Plus the new tax benefit - $ 824

Total tax saving - $3,824pa

Total tax payable 01 July 07 - $ 524pa

Please remember that in the above calculations, the new tax scales come into force on 01 July 2006. However, the proposed tax breaks on superannuation benefits, second calculation, are not due to take effect until 01 July 2007. It should also be borne in mind that the proposed superannuation benefits are at this point in time, just that, proposals and that the calculated benefit is only speculation as there is a fair way to go before they become part of the Income Tax Act.

Also, from 01 July 2006 the upper limit for the Senior Australian Tax Offset (SATO) has been increased and those eligible for the benefit will pay no tax on their annual income up to $24,867, for singles and up to $41,360 for couples, which will have the effect of including some taxpayers who were just above the cut-off limit last year. Also, the amount of the offset has been increased for those taxpayers who received the offset last year. In essence if you received a SATO last year you will most probably receive a higher tax offset benefit this year and if your were slightly above the cut-off limit last year you may find you are within the extended limits this year. Check this with your Tax Agent.

Finally, there is to be additional support for recipients of Carer Allowance. As provided for in the last two budgets Carers will again receive the $600 tax-free bonus payment this year, and in addition, for this year, will receive an extra tax-free bonus payment of $1000.

All-in-all this budget has been bountiful for Self-funded Retirees (DFRB – DFRDB recipients) who are aged 60 years or over, for Senior Australians and Carers and the Treasurer (Government) is to be commended for the financial benefits he has provided and proposed for Senior Australians.

Telephone the president if you have any questions or any queries on the benefits referred to above or if you have suggestions you think might/should be included in the VLSVA Qld submission. All submissions must be received in Treasury by 09 August 2006, therefore, if you have a constructive suggestion get it in to the DFRDB Sub-committee as soon as possible.

Rodney Nott
President
VLSVA Qld