The recent round of superannuation reforms might make many Australians question the future of superannuation and whether it is still a safe investment vehicle. The answer is, yes - for now.
There is no question, however, that the $1.5 trillion sitting in superannuation accounts is a very large tax temptation. The problem for any Government is that once you have a concession in place, it's almost impossible to remove it without angering voters. Increasing tax on superannuation is a major challenge for the Australian Government, because it affects almost every taxpayer and Treasury is already forecast to collect $9.05 billion in tax from superannuation in 2013/2014.
While there are some reforms that many will be happy to forget, like the increased tax on superannuation pensions and annuities, there are others, like the reforms to the operation of the excess contribution tax, that are sorely needed.
Either way, constant change means that if you're building your super, you'l need to keep one step ahead and constantly reassess your position. This applies to everything from salary sacrifice agreements to investment and retirement planning.
So what are the pros and cons of super?
Refunding excess contribution tax
The impact of the excess contribution tax (ECT) has been contentious for quite some time. In the 2011/2012 financial year, the Australian Taxation Office issued 66,435 ECT assessments with a value of $174.3m.
Current arrangements for concessional contributions that exceed the annual cap mean that they are taxed at the top marginal rate of 46.5%, and in some cases considerably higher. Typically the ECT assessments apply if the excess contributions are too high or are made in the wrong financial year.
In a welcome move, the proposed reforms will allow individuals to withdraw excess concessional contributions from their super fund. These excess concessional contributions will then be taxed at the individual's marginal tax rate plus an interest charge.
Unfortunately if you have already paid ECT, you can't get your money back. The reforms, if enacted, will apply to excess concessional contributions made from 1 July 2013.
Changes to the contributions cap
The Government announced an increase in the concessional contribution limit in 2010. The limit rose to $50,000 for people aged 50 and over with a superannuation balance below $500,000. The original start date was 1 July 2013, but this was deferred to 1 July 2014.
In this latest round of proposed changes, the Government has announced that a contributions cap of $35,000 will now apply from 1 July 2013 for those 60 and over, and 1 July 2014 for those 50 and over.
In addition, the Government has decided not to limit the higher cap to just those with super balances below $500,000. It will now apply to everyone who meets the age tests. For everyone else, the contributions cap will remain at $25,000 (with indexing returning to the cap from 1 July 2014).
The increased contributions caps and higher contribution base will allow more people to benefit from tax planning opportunities, particularly for salary sacrifice and those transitioning to retirement.
Changing how earnings on super are taxed
At present, all new earnings (such as dividends, rent and interest) on assets supporting income streams (superannuation pensions and annuities) are tax-free. The earnings made on superannuation assets when building your super (accumulation phase), are taxed at 15%.
Under the reforms, from 1 July 2014, the tax exemption for earnings on superannuation assets supporting income streams will be capped at the first $100,000 of future earnings per individual per annum. Earnings above $100,000 will be taxed at 15% (the same concessional rate that applies to earnings in accumulation phase).
So, earnings on superannuation assets supporting income streams will be tax free up until $100,000 each year and then taxed at 15%.
Special transitional arrangements apply to capital gains on assets purchased before 1 July 2014 that in some circumstances will push the impact of the new tax out until 2024. The proposed change will more than likely affect:
- People whose fund balance exceeds $2 million (assuming a 5% cash rate return);
- People whose fund assets produce a higher level of income return than usual; or
- Situations where a CGT event occurs and pushes fund income above the threshold.
People holding property inside their superannuation fund are particularly exposed.
So, what can you do about it? If you have a spouse, then think about contribution splitting or withdrawing super and contributing it into your spouse's super account. This might result in a more equitable distribution of earnings on superannuation balances and reduce the likelihood of one member's fund earnings exceeding $100,000.
Centrelink and pensions
Another reform seeks to tighten Centrelink's income test.
Currently, account based pensions receive preferential concessional treatment under Centrelink
pension income testing arrangements compared with income from other assets, such as dividends from shares or interest.
This reform will have a greater effect on people assessed under Centrelink's income test as opposed to the assets test. In some circumstances, the reform will increase the level of income assessed under the income test for Centrelink support.
If you need to make any changes to how your pension is structured going forward, you should look at making these changes prior to 1 January 2015.
Superannuation has become an increasingly complex beast. Please contact Bates Cosgrave on 02 9957 4033 for guidance and advice on your superannuation obligations and opportunities.
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Last updated May 2013. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.