Whilst the announcement has at least alleviated the growing panic in the community regarding the upcoming superannuation changes, it must be noted that the proposed reforms will not be legislated before the Federal election and there is therefore some uncertainty over the prospect of any of the measures being ultimately put into place.
New Earnings Threshold for Tax Exemption for Pension Accounts
Current rules: All earnings on superannuation pension accounts are tax free. All earnings on accumulation accounts are taxed at 15%.
New rules: From 1 July 2014, the first $100,000 of earnings (such as dividends and interest) per year on pension accounts will be tax free for each individual. Earnings on pension accounts above $100,000 will be taxed at 15%. Special staggered provisions will apply to capital gains (detailed below). Earnings on the accumulation accounts will continue to be taxed at 15%.
A summary of the changes is provided in the table below:
|Pension accounts earnings||Accumulated accounts earnings|
|Current rules||0% tax||15% tax|
|New rules||First $100,000 per person per year - 0%||15% tax|
|Earnings above $100,000 per person per year - 15%|
The threshold will be indexed to the Consumer Price Index (‘CPI’) and will increase in $10,000 increments. It is not yet known how this new measure will be administered and we anticipate that more details will be released in due course if this reform goes ahead.
Staggered application of the new rules for capital gains:
Special provisions will apply to capital gains incurred on assets by superannuation funds:
For assets purchased prior to 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024
For assets purchased between 5 April 2013 and 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014
For assets purchased from 1 July 2014, the reform will apply to the entire capital gain
This means that taxpayers with Self Managed Super Funds will have 10 years to decide whether they wish to restructure their superannuation assets before any capital gains in respect of existing assets become subject to the new rules.
Implementing the proposed measures are likely to present an administrative challenge and will require robust integrity measures to prevent them from being circumvented by either of:
superannuation splitting between spouses to equalise the pension account balances so as not to have a situation where one spouse’s high pension account generates taxable earnings above the $100,000 threshold, while the other spouse’s low pension balances generates earnings well below the threshold;
spreading of superannuation balances between multiple funds and thus obtaining multiple $100,000 thresholds.
Who is likely to pay tax in their pension accounts?
Assuming a conservative 5% return, in order to generate earnings of over $100,000 per year, a pension account balance would need to be at least $2m and this is the figure that has been brandished about by the Government in the context of these proposed reforms.
However, with higher rates of return, smaller pension accounts will fall above the $100,000 earnings threshold and will be required to pay 15% tax on the excess. For example, at 8% return per annum, a pension account balance of $1.25m will max out the $100,000 threshold.
These measures would also apply to defined benefit funds.
Importantly, these changes will not affect the tax treatment of withdrawals from superannuation, which will continue to be tax free for those aged 60 and over, while existing rates will continue to apply for those aged under 60.
Higher Concessional Contributions Cap
Current rules: all concessional contributions, regardless of the age of the taxpayer, are capped at $25,000 per person per year. These include mandatory employer superannuation guarantee contributions, salary sacrifice and personal deductible contributions by self-employed individuals.
New rules: from 1 July 2013, the concessional cap will increase for those aged over 60 from $25,000 to $35,000. From 1 July 2014 the increased cap will also apply to those aged 50 and over.
The increased cap will not be indexed.
The proposed higher cap is much simpler to administer than the now-scrapped proposal of only allowing higher caps for those taxpayers with superannuation balances below $500,000.
However, whilst generous on the face of it, it must be pointed out that the increased cap will not be indexed and the value “increase” will be eaten up by CPI increases over the next 5 or so years.
Excess Concessional Contributions Tax Administration Changes
The system of excess contributions tax which has been in place since 2007 will be changed.
Current rules: Concessional contributions above the cap are effectively taxed at the top marginal tax rate of 46.5% by applying an excess contributions tax of 31.5% on top of the standard 15%. This is a significant penalty for people who are on income below the top marginal rate.
New rules: The Government will allow all individuals to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund which will then be taxed 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. This will be beneficial to those taxpayers who are on incomes below the top marginal rate, i.e. below $180,000 taxable income.
This measure will provide a welcome relief to the affected taxpayers in the lower income tax brackets who are treated quite harshly under the current rules on their excess concessional contributions.
Importantly however, the new measure will not apply until the 2013/2014 year, meaning that there will be no relief for any excess concessional contributions made during the current 2012/2013 year.
This is of particular significance given the reduction in concessional contribution caps for those aged over 50 from $50,000 to $25,000 since 1 July 2012. The reduced caps in the current year mean that more people are likely to inadvertently make excess concessional contributions if, for example, they had not updated their salary sacrifice arrangements to lower amounts.
Superannuation Income Streams Will Count Towards Age Pension Income Test
The government will extend the standard Centrelink Age Pension deeming arrangements to apply to new superannuation account-based income streams assessed under the pension income test rules after 1 January 2015.
All products held by pensioners before 1 January 2015 will be grandfathered indefinitely and will 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.
The Government considers Superannuation account-based income streams to be a form of investment that provide the individual with a tax-free retirement income stream. Currently, the income from this type of investment receives “highly concessional treatment” under pension income testing arrangements compared with income from similar assets, such as dividends from shares or interest from term deposits which is subject to deeming.
We note that there have been some confusing reports in the media and encourage you to contact your Ruddicks adviser if you have any questions regarding the proposed changes and how they might apply to your circumstances.