The government has announced its intended reforms to the superannuation system, prefacing its announcement with a re-commitment on its decision to gradually increase the Superannuation Guarantee rate from 9% to 12%.
The nub of the long statement however seems to be that income from certain pension streams are to be taxed at 15%.
According to the government, the reforms will:
- cap the tax exemption for earnings on superannuation assets supporting income streams at $100,000, with a concessional tax rate of 15% applying thereafter, and apply the same treatment to defined benefit funds
- simplify the design and administration of the higher concessional contributions cap
- reform the treatment of concessional contributions in excess of the annual cap
- extend the normal deeming rules to superannuation account-based income streams
- extend concessional tax treatment to deferred lifetime annuities, and
- further reform the arrangements for lost superannuation.
Treasurer Wayne Swan said the reforms are estimated to save around $900 million over the forward estimates period.
It was a long press release, so I apologise in advance for the lengthy post….. let’s take a look at some of the announcements.
Tax exemption on earnings supporting income streams
Under current arrangements, all new earnings (such as dividends and interest) on assets supporting income streams (superannuation pensions and annuities) are tax-free. This is in contrast to earnings in the accumulation phase of superannuation, which are taxed at 15%.
From July 1, 2014, earnings on assets supporting income streams will be tax-free up to $100,000 a year for each individual. Earnings above $100,000 will be taxed at the same concessional rate of 15% that applies to earnings in the accumulation phase.
Treasury said that for superannuation assets earning a rate of return of 5%, this reform will only affect individuals with more than $2 million in assets supporting an income stream. It estimates that around 16,000 individuals will be affected by this measure in 2014-15, which represents around 0.4% of Australia’s projected 4.1 million retirees in that year. (Keep in mind these estimates are based on a very conservative 5% rate of return. It’s worth noting that, according to the latest ATO data, the average SMSF has $968,000 in assets and enjoys returns above 5% – CL).
Same treatment for the pollies
The government said it will ensure that members of defined benefit funds are affected by this new reform, including federal politicians. Defined benefit fund members will be affected by the reform in the same way as members of defined contribution funds (that is, that there will be a corresponding decrease in concessions in the retirement phase).
The government said this will 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.
Where a person’s notional yearly earnings exceed the $100,000 threshold, the amount in excess of $100,000 will be subject to a 15% tax.
Reforming the higher concessional contributions cap
The government will reform the administration of the proposed higher concessional contributions cap (it currently stands at $25,000) by providing an unindexed $35,000 concessional cap to anyone who meets certain age requirements.
The government said it has decided not to limit the new higher cap to individuals with superannuation balances below $500,000 in light of feedback from the superannuation sector that this requirement would be difficult to administer. Its motivation is to 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. Accordingly, the government will bring forward the start date for the new higher cap to July 1, 2013 for people aged 60 and over. Individuals aged 50 and over will be able to access the higher cap from the current planned start date of July 1, 2014. The general concessional cap, for everyone irrespective of age, is expected to reach $35,000 from July 1, 2018
Treatment of concessional contributions in excess of the annual cap
The government will reform the system of excess contributions tax (ECT). Under the current arrangements, concessional contributions that are in excess of the annual cap are effectively taxed at the top marginal tax rate (generally 46.5%) rather than the normal super rate of 15%. This outcome is achieved through the imposition of ECT. This is a severe penalty for individuals with income below the top marginal tax rate.
So the government has announced that it will allow all individuals to withdraw any excess concessional contributions made from July 1, 2013 from their superannuation fund.
These rules will ensure that individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages and had chosen to make a non-concessional contribution.It will also tax excess concessional contributions at the individual’s marginal tax rate, plus an interest charge, to recognise that the tax on excess contributions is collected later than normal income tax.
Treasury estimates that this reform will reduce the tax liability of around 41,000 people in 2013/14, by around $1,300 on average. The flip side is that around 59,000 people on the top marginal tax rate will have a slightly larger tax liability due to the interest charge.
Extending deeming rules to account-based income streams
The normal deeming rules are to be extended to superannuation account-based income streams for the purposes of the pension income test to ensure all financial investments are assessed under the same rules.
Under the change, standard pension deeming arrangements will apply to new superannuation account-based income streams assessed under the pension income test rules after January 1, 2015.
All products held by pensioners before January 1, 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.
Income from this type of investment currently receives concessional treatment under pension income testing arrangements compared with income from similar assets, such as dividends from shares or interest from term deposits that is subject to deeming.
The government said that this is an inequity in the income testing rules which means that pensioners with similar levels of financial assets receive different amounts of pension. The reform is a recommendation of the Pension Review and Australia’s Future Tax System Review.
Extending concessional tax treatment to deferred lifetime annuities
The government will encourage the take-up of deferred lifetime annuities (DLAs), by providing these products with the same concessional tax treatment that superannuation assets supporting income streams receive. This reform will apply from July 1, 2014.
Reform to lost super arrangements
The value of lost super held by funds has fallen 10% (from $20.2 billion to $18.1 billion), and the number of lost accounts has reduced by 30% (from 5 million to 3.5 million) over the 18 months to December 31, 2012.
In the 2012-13 Mid-Year Economic and Fiscal Outlook, the government announced that interest will be paid from July 1, 2013 on all lost superannuation accounts reclaimed from the ATO (at a rate equivalent to the consumer price index). It also announced that the account balance threshold below which inactive accounts, and accounts of uncontactable members, are required to be transferred to the ATO will be increased to $2,000 to protect them from erosion from fees and charges.
The government announced that it will further increase the account balance threshold to $2,500 from December 31, 2015, and to $3,000 from December 31, 2016.
Treasury analysis shows that:
- A 20-year-old with $3,000 in an inactive superannuation account will be able to claim around $3,394 from the ATO after five years, a boost to their super savings of around $671 compared with what the balance would be if their account remained with their fund.
- A 30-year-old with $3,000 in an inactive superannuation account will be able to claim around $3,394 from the ATO after five years, a boost to their super savings of around $898 compared with what the balance would be if their account remained with their fund.
New “Council of Superannuation Custodians”
The government will establish a Council of Superannuation Custodians to ensure that any future changes are consistent with a yet-to-be-drawn “Charter of Superannuation Adequacy and Sustainability”.
The charter will be developed, the government said, against the principles of certainty, adequacy, fairness and sustainability, and will outline the “core objects, values and principles” of the superannuation system. The council will be charged with assessing future policy against the charter and providing a report to be tabled in Parliament.
So, there you have it; a somewhat mixed assortment of proposed super changes. Of course, it’s early days yet and there is a huge gap between between proposed changes and anything actually being enacted as proposed. I guess we’ll see what happens…..