The Government has announced a range of superannuation reforms, including:
- taxing earnings in pension phase that exceeds $100,000pa
- recognising deferred annuities for earnings tax concession purposes
- increasing the concessional contributions cap for those aged 50 and over
- increasing the ability to refund excess contributions
- commence deeming account based pensions under the social security income test
- increasing the balance threshold below which lost super must be transferred to the ATO
The majority of these proposed reforms will commence on 1st July 2014. It is important to note that the changes announced are not yet legislated and may change prior to becoming law.
1. Tax treatment of earnings on superannuation assets supporting income streams – from 1 July 2014
From 1 July 2014 the Government proposes that future earnings, including interest and dividends, on assets supporting an income stream liability will be tax free up to $100,000 a year for each individual. Earnings above the $100,000 threshold are proposed to be taxed at the 15% tax rate that applies to earnings in the accumulation phase of super.
Under current tax rules, all income received by a superannuation fund from assets supporting an income stream such as an account based pension, is completely tax free.
The Government has also announced that the proposed $100,000 threshold will be indexed to the Consumer Price Index (CPI), and will be increased in increments of $10,000.
Special arrangements for capital gains on assets purchased before 1 July 2014
- For assets purchased before 5 April 2013, the proposed changes will only apply to capital gains that accrue after 1 July 2024
- For assets purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the proposed changes to the entire capital gain, or only that part that accrues after 1 July 2014
- For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.
Changes to apply to defined benefit funds
The Government has also announced the proposed changes will also apply to members of defined benefit funds in the same way that they apply to members of accumulation funds.
This is proposed to be achieved by calculating the notional earnings each year for defined benefit members in receipt of a concessionally-taxed superannuation pension. These calculations will be based on actuarial calculations, and will depend both on the size of the person's superannuation pension and their age. The amount of notional earnings each year will fall as a person grows older, in the same way that yearly earnings for people in defined contribution schemes fall over time as they draw down their capital.
GEM Comment
At this stage it is unclear how these proposals would practically work. However, to cater for individuals who have two or more pension funds it seems likely that trustees will be required to report income amounts received by the fund in respect of each member.
The proposed special arrangements for capital gains may also require trustees, including self- managed super fund (SMSF) trustees, and their advisers to take into account the potential future tax treatment of a fund’s CGT assets when reviewing the fund’s investment strategy and portfolio.
Other unresolved questions in relation to these reform proposals include:
- whether capital gains will still attract the capital gains tax discount for the purposes of the $100,000 threshold
- if capital losses in one fund or investment option will be able to be offset against capital gains in another fund or investment option
- whether any tax liability on income over the $100,000 threshold will be levied on the member or the fund.
2. Concessional taxation for deferred annuities – from 1 July 2014
The Government will encourage the take-up of deferred lifetime annuities, by providing these products with the same concessional tax treatment that superannuation assets supporting income streams receive.
3. Concessional contributions cap – from 1 July 2013
The Government proposes to introduce a higher concessional contributions cap, initially for those aged 60 or more, and then for those aged 50 or more. This higher cap will be $35,000 per year, unindexed. Table 1 illustrates the concessional caps that will apply for the 2012-13 to 2014-15 financial years.
Importantly, the Government has confirmed that it will not proceed with earlier proposals to limit the new higher cap to those aged 50 or more with superannuation balances below $500,000.
GEM comment
The Government has recognised that this measure will “...allow people who have not had the benefit of the Superannuation Guarantee for their entire working lives to have the ability to contribute more to their superannuation as their retirement age approaches...”. However, indexation of the standard concessional cap means that by 1 July 2018, it is expected to reach the higher $35,000 cap for those under 50.
The effectiveness of transition to retirement (TTR) strategies has been limited in recent years by a number of concessional cap reductions. With eligible clients aged over 60 (from 1 July 2013) and aged 55 to 59 (from 1 July 2014) able to make greater concessional contributions, TTR strategies will in many cases be more tax effective and lead to a higher end retirement balance.
4. Excess concessional contributions – from 1 July 2013
The Government proposes allowing all individuals to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund. Additionally, the Government will tax excess concessional contributions at the individual’s marginal tax rate, plus an interest charge (recognising that excess contributions tax is collected later than personal income tax).
The Government has also confirmed that individuals with income greater than $300,000 will be subject to a 30% rate of tax on certain non-excessive concessional contributions rather than the 15% rate.
GEM comment
Currently, an individual may request a refund of excess concessional contributions of up to $10,000 made since 1 July 2011 on a once-only basis. It would appear that the important change announced in the current reforms is to extend that relief to all concessional contributions, regardless of amount and when made.
The imposition of an additional interest charge on excess concessional contributions appears likely to curtail strategies for those on the highest marginal tax rate to deliberately make excess concessional contributions. Currently, an individual on the 46.5% marginal tax rate is subject to the same rate of tax on personal income as excess contributions, but benefits by a timing arbitrage on the latter, due to the collection of PAYG income tax compared to that of excess contributions tax. Additional interest charges would appear to remove this benefit.
Details and draft legislation on exactly how the higher rate of tax on contributions for high income earners measure will operate remain outstanding, other than the following:
- The additional tax will be collected through a mechanism similar to that which operates for excess contributions tax.
- ‘Income’ means taxable income, concessional super contributions, adjusted fringe benefits, net investment loss, target foreign income, tax-free government pensions and benefits, less child support.
- If concessional contributions themselves push a person over the $300,000 limit, the higher rate of tax will only apply to the part of the contributions that is in excess of the threshold.
- ‘Concessional contributions’ means all employer contributions (both SG and salary sacrifice), deductible personal contributions and notional employer contributions for defined benefit members.
- Excess concessional contributions will only be subject to excess contributions tax, not the additional 15% tax.
5. Deeming on account based income streams – from 1 January 2015
The Government proposes extending to account based income streams the Centrelink deeming rules that currently apply to financial investments such as bank deposits, shares and managed funds.
Currently, the first $45,400 for a single pensioner and $75,600 for a pensioner couple of financial investments is deemed at 2.5% pa. Any financial investments over these thresholds are deemed at 4% pa.
Under the change announced, these standard Centrelink deeming rules would apply to superannuation account based income streams from 1 January 2015. However, all such products held before 1 January 2015 will be grandfathered and continue to be assessed under the existing deductible amount rules indefinitely, unless the pensioner chooses to change to another product.
GEM comment
Many retirees seeking to optimise their financial situation under the Centrelink means tests currently consider strategies involving non-deemed investments or seeking out returns on deemed assets in excess of the deeming rates. Traditionally, account based pensions have featured prominently in the first of these strategies.
Both the assets test and income test determine the actual amount of Centrelink pension payable to an individual. Taking both these tests into account, those clients most likely to be adversely affected by the proposed change are those whose account balances are:
- greater than the point at which deemed income exceeds the income free area (currently $152 pf for a single person and $268 pf for a couple combined), but
- less than the point at which the assets test determines the benefit paid. These asset levels are summarised in Table 2.
Additionally, applying deeming to account based pensions may result in greater focus on other non-deemed investments, such as direct property.
6. Lost super – increased account balance threshold – from 31 December 2015
In the 2012—13 Mid-year Economic and Fiscal Outlook, the Government announced that super balances of inactive and uncontactable members below $2,000 must be transferred to the ATO from 31 December 2012. In addition, from 1 July 2013 it proposed paying interest at a rate equal to the CPI on all lost superannuation accounts reclaimed from the ATO.
The Government now proposes increasing the account balance threshold to $2,500 from 31 December 2015 and $3,000 from 31 December 2016.
The information contained in this Briefing is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468 (Colonial First State) has of the relevant Australian laws and the joint media release of the Treasurer and Minister Shorten as at 5 April 2013. The Briefing should not be taken to indicate if, when or the extent to which, announcements will become law. While all care has been taken in the preparation of the Briefing (using sources believed to be reliable and accurate), no person, including Colonial First State, GEM Capital Financial Advice or any other member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on the information. The Briefing has been prepared for the sole use of advisers, is not financial product advice and does not take into account any individual’s objectives, financial situation or needs.