Proposed Superannuation Changes
As you may already be aware, this morning the Labor Government announced its proposed superannuation reforms. Whilst the Government ‘Joint Media Release’ will help quell some of the speculation in the press about what changes Labor was going to announce in respect of superannuation in the upcoming Federal Budget, it has raised a number of questions for us, our clients and all superannuants in general.
Below is a summary of today’s announcements:
1. Individuals pension funds earnings will be tax exempt up to $100,000 from 1 July 2014.
This announcement will likely have the greatest impact on us and our clients.
From 1 July 2014 any individual whose pension fund has earnings in excess of $100,000 will pay 15% on the excess earnings over $100,000 ie. only the first $100,000 will be exempt from tax after 1 July 2014 whereas currently all earnings, regardless of the amount, are exempt from tax. This reform will apply to all pension funds: SMSFs; retail funds; defined benefit funds; and even Public Sector funds and the funds of federal politicians.
While there is not a great deal of detail on how this measure will be applied it appears as though earned income and realised capital gains (with some grandfathering/transitional rules for existing CGT assets) over $100,000 per individual pension recipient will be taxed at 15% from 1 July 2014.
2. Higher concessional contributions caps will be introduced from 1 July 2013.
Currently our concessional contribution cap is $25,000, and for most people approaching retirement this cap is too low for those who want to top up their superannuation with pre-tax income (eg. via salary sacrifice).
From 1 July 2013 the cap for people aged 60 and over will increase from $25,000 to $35,000, and from 1 July 2014 the cap for people aged 50 and over will be indexed – potentially up to $30,000 – and “is expected to reach $35,000 from 1 July 2018” according to the Joint Media Release. This is good news that the Government has committed to increasing the concessional contributions cap for people 50 and over, but disappointingly the announcement was silent on the contribution cap for those under 50.
3. Changes to excess concessional contributions tax from 1 July 2013.
Currently where people exceed their concessional contributions cap of $25,000 pa. the excess is taxed at 46.5% (15% super tax plus an additional 31.5%) with the option for an excess of up to $10,000 to be refunded on the first offence. It is proposed from 1 July 2013 to allow individuals to withdraw any excess concessional contributions and the Government will only tax the excess at the individual’s marginal tax rate, plus an interest charge to allow for what would be late collection of the tax (later than if the individual had taken salary and PAYG tax had been paid).
This seems like a fairer application of the excess concessional contributions tax. But again disappointingly the announcement was silent on excess non-concessional contributions.
4. Applying Centrelink deeming rules to account based pensions commenced after 1 January 2015.
Currently where someone is receiving a Centrelink benefit (predominantly the Age Pension) Centrelink apply a deeming formula (2.5% on the first $75,600 (for a couple) and 4% on the balance of financial assets) to determine the income a benefit recipient earns, for Income Test purposes, from most investments. However this is currently not the case for account based pensions (most pensions paid from SMSFs and retail super funds) where Centrelink rely on a formula based on the amount drawn each year less the capital value at the time the pension commenced divided by a life expectancy factor – which in most cases results in a lower income but in some cases can produce a higher income for Centrelink purposes.
From 1 January 2015 it is proposed to bring account based pensions into line with other financial assets and include them under the deeming rules, but all account based pensions commenced prior to 1 January 2015 will be grandfathered.
5. The formation of a ‘Council of Superannuation Custodians’
The Government has announced they will establish a ‘Council of Superannuation Custodians’ which will be charged with assessing future policy that affects superannuation. This seems like a good initiative and industry bodies in the main appear to be supportive of this measure.
6. Other changes to deferred lifetime annuities and arrangements for lost superannuation.
The other announcements affect lifetime annuities (bringing their taxation into line with pension funds) and new arrangements for lost superannuation balances, changes which in the main may not affect our clients. However, bringing the taxation of lifetime annuities into line with pension funds may improve this product’s position in the market place.
You should note that these announcements are only Labor Party proposals at this stage and would have to pass through both houses (no doubt with amendments) before being passed into Law.