In late April 2015, the ALP announced changes to its superannuation policy which will impact those who earn $250,000 or more per year or have $1.5 million or more in superannuation. The proposed purpose of the changes are to save an estimated $14 billion over 10 years. If implemented, the changes will affect 110,000 Australians. This article discusses the proposed changes and how they may affect you or your clients.
In late April 2015, the ALP announced changes to its superannuation policy which will impact those who earn $250,000 or more per year or have $1.5 million or more in superannuation. The proposed purpose of the changes are to save an estimated $14 billion over 10 years.
What is proposed?
If the ALP is elected, it proposes to:
- impose a 15 percent tax on those earning more than $75,000 from their superannuation investments per year
- lower the high income super charge (HISC) threshold from $300,000 to $250,000.
The changes, which could come in from 1 July 2017, seek to target the superannuation concessions enjoyed by high net wealth individuals.
Tax implications for those in the retirement phase
Currently, earnings from superannuation in the retirement phase are tax free.
The ALP proposes to make the following changes:
- the initial $75,000 earned from superannuation income streams will be tax free
- any amount over $75,000 will attract a 15 percent tax on amounts above that threshold.
At this stage it is not entirely clear how the tax will be imposed, for example, whether the individual or the fund will be taxed. The ALP’s policy suggests it will be assessed in the hands of the individual, by stating that the additional 15 percent tax will be applied to ‘annual superannuation incomes from [superannuation] earnings of more than $75,000′.
The ALP website provides the following examples:
EXAMPLE 1. DOUG
- Doug is 63 years old, retired and he has $800,000 in super. Doug’s super is in its pension phase where earnings are tax-free. Last year Doug’s super earned $40,000 (at a rate of 5 percent) which he has taken as pension payments. Doug is entitled to a part pension.
- The ALP’s proposed policy would not affect Doug’s retirement income.
EXAMPLE 2. SUSIE
- Susie is also 63 years old, retired and she has $1.8 million in super. Susie’s super is in its pension phase where earnings are tax free. Last year Susie’s super earned $90,000 (at a rate of 5 percent) which she has taken as pension payments. Susie earns too much to be entitled to a part pension.
- Under the ALP’s proposed policy, Susie will pay 15 percent tax on earnings over $75,000. Susie continues to earn $75,000 tax free, but will face a concessional 15 percent rate on the remaining $15,000. This equates to $2250, and after tax earnings of $87,750.
Tax implications for those still earning
The ALP also proposes to reduce the threshold at which HISC kicks in from $300,000 to $250,000.
Individuals who earn more than $250,000 per annum could be required to pay an extra 15 percent tax on super contributions. The extra amount is only payable on an individual’s super contributions which push them over the $250,000 threshold.
At present, someone on $250,000 receives a concession of 30 percent from their top marginal tax rate on superannuation contributions. The ALP seeks to change this, so those who earn $250,000 will also be subject to HISC and their tax concession will be reduced from 30 percent to 15 percent .
Under the proposed changes, high income individuals will still receive a 15 percent tax concession on their superannuation contributions.
The ALP website provides the following examples:
EXAMPLE 3. JANE
Jane is 45 years old and earns $235,000 a year and contributes $22,325 to super, for a combined total of $257,325. As $7,325 of her combined total exceeds the cap, Jane continues to receive a 30 percent concession for her contributions up to the $250,000 threshold and then receives a 15 percent tax concession on her top marginal tax rate of 45 percent on the contribution she makes exceeding the $250,000 threshold.
Shadow treasurer Chris Bowen stated that if the ALP was elected, these were the only changes they were seeking to make to the tax treatment of superannuation.
These policy changes need to be kept in context – namely they are changes proposed by the party currently in opposition. However it is worthwhile bearing in mind some implications of the possible changes.
ADMINISTRATION AND COMPLIANCE
It seems apparent that such a policy will greatly increase administrative and compliance issues for super funds. If, say, the tax is assessed on:
- pension income in the hands of the individual
- but limited to that part of the pension income attributable to earnings in the fund above $75,000 per annum,
then an exercise must be undertaken to determine what part of the pension income is attributable to those earnings, and what part of the pension income is funded by a return of the capital funding the pension. Such an approach certainly runs counter to one of the key original rationales for tax-free pensions, namely administrative simplicity.
PLANNING FOR SUCH CHANGES
It is sensible, however, for all advisors to be aware of the possible implications of such a legislative change, and to consider how such changes may affect you or your clients.
For instance, if clients who are in a relationship have drastically different account balances in super, then advisors should bear in mind the benefits of implementing measures aimed at evening out those balances (including by using contributions- splitting). This will help ensure that, if such policies become law, couples will not pay more tax than they have to just because one partner has a much larger account balance (and pays tax on earnings/income over $75,000) than the other (who may have earnings/income nowhere near $75,000 per annum).