Government outlines proposed superannuation changes
On 5 April 2013, the Australian Government announced that it plans to make a number of changes to the superannuation system, including the way certain aspects of super are taxed.
These changes are not yet law, and some of these proposed changes may only apply if the current government is re-elected.
Some of the key proposed changes are as follows:
Introducing a higher concessional contributions cap
The Government had previously announced that from 1 July 2014 it planned to allow people aged 50 and over, with superannuation balances below $500,000, to each year make up to $25,000 more in concessional (before-tax) contributions than allowed under the standard $25,000 annual concessional contributions cap.
The concessional contributions cap applies to a person’s employer super contributions (including compulsory SG as well as salary sacrifice) and contributions for which a person claims a tax deduction.
As part of these announcements, the Government will instead provide an un-indexed $35,000 concessional contributions cap, regardless of the size of that person’s superannuation balance, as follows:
− For people aged 60 and over, this new higher annual concessional contributions cap will apply for contributions made from 1 July 2013; and
− For people aged 50 and over, this higher concessional contributions cap will apply from the current planned start date of 1 July 2014.
The standard $25,000 (indexed) concessional contributions cap will continue to apply for people below these ages.
Reform of excess concessional contributions tax
Under the current rules, concessional contributions that exceed the concessional contributions cap are effectively taxed at the top marginal tax rate (46.5 per cent) once excess contributions tax is applied – rather than the normal rate applied to these contributions of 15 per cent.
The Government has announced a proposed new excess contribution tax regime for concessional contributions. It will allow people who have exceeded their concessional contributions cap after 1 July 2013, to withdraw the excess contributions from their superannuation fund with the excess contributions being taxed at their marginal tax rate.
In addition, an interest charge will be levied on the excess contributions to recognise that the tax on these excess concessional contributions is being collected at a later date than normal income tax.
Limiting the tax exemption for earnings in pension phase
Currently, all earnings (including dividends, interest, rent, and capital gains etc) derived by a superannuation fund on assets supporting superannuation income streams (i.e. assets in the pension phase) are tax-free – these earnings are classified as exempt current pension income of a superannuation fund.
On the other hand, earnings in the accumulation phase of superannuation are taxed at 15 per cent – as these earnings form part of the fund’s assessable income.
According to the announcement, from 1 July 2014 the amount of exempt current pension income available to a superannuation fund will be limited to $100,000 a year for each individual.
Fund earnings, derived from pension assets, above this limit will be taxed at the 15 per cent rate that applies to earnings in the accumulation phase.
Based on an example provided by the Government, this proposal will impact persons with around $2,000,000 in an account based income stream assuming an earning rate of 5 per cent. Obviously the fund’s earning rate from time to time will determine how many people are subject to this new tax.
This proposed $100,000 limit will be indexed to the Consumer Price Index (CPI), and will increase in $10,000 increments.
Currently, when a superannuation fund makes a capital gain on assets in the pension phase, the capital gain amount is also treated as exempt current pension income (and therefore exempted from tax). However, a capital gains tax event is only triggered in the year that the fund disposes of the asset. As such, special arrangements will apply for capital gains on assets purchased by a fund before 1 July 2014.
It is important to note that this reform will not affect the tax treatment of withdrawals (both lump sums and pensions) made from a superannuation fund. Withdrawals will continue to remain tax-free for people aged 60 and over, and be subject to the existing tax rates for people aged under 60.
Age pension impacts
The government has proposed to extend the normal deeming rules to superannuation account-based income streams for the purposes of the pension income test. The Government said this was to ensure all financial investments are assessed fairly and under the same rules.
From 1 January 2015, the standard pension deeming arrangements will apply to new superannuation account-based income streams assessed under the pension income test rules.
All products held by pensioners before 1 January 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules for the life of the product so no current pensioner will be affected, unless they choose to change products.
It should be remembered that these proposed changes are not yet law, so the finer details are still to emerge. However, in the meantime, for more information, please contact your financial adviser.
What you need to know
Any advice contained in this document is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters.