Most media reports on the Federal Government’s plans to tax earnings of more than $100K per annum in a pension fund have failed to record some significant impacts of the proposal.
The Government estimates that around 16,000 people will be affected in the first year. However, the true number may be much higher, and the investment strategies of superannuation funds may be changed for the wrong reasons.
It’s planned that from 1 July 2014 superannuation pension funds and annuities will be taxed at 15% on earnings above $100,000 in any one year instead of being tax free. The $100,000 threshold will be indexed to CPI. This change comes on the back of reforms to double the contributions tax from 15% to 30% for concessional contributions made on behalf of individuals earning more than $300,000 (calculated before deducting the concessional contributions).
There are two substantial consequences that most reporting has missed.
Capital gains may push even small funds over the $100K pa limit
Many self managed super funds hold assets for a significant period, such a shares, real estate, and other investments. Even though a fund may be quite small, and its average annual income small, a significant capital gain could be realised in a single year when these assets are sold. When even a modest capital gain is added to the ordinary ‘regular’ income of the fund, the $100K could be exceeded. To address this inequity, Gadens will lobby the government to average income of funds over four years and for the ‘super-tax’ only to apply when the average annual income exceeds $100K over four years. Failure to make this change may skew investment strategies and extend the tax unintentionally to ‘average’ pensioners.
Death duties effectively re-introduced
The proposed measures may have serious tax consequences for members upon death. In the 2012-13 Mid-Year Economic and Fiscal Outlook (2012-13 MYEFO), the Government announced that it would amend the tax laws to clarify that earning on assets supporting superannuation pensions remain tax exempt following death of the pensioner until death benefits have been paid out of the fund. The current announcement effectively reverses the announcement in the 2012-13 MYEFO for earning above the $100,000 threshold.
There is some relief
The Government has announced special transitional arrangements for capital gains that will apply as follows:
- For assets purchased before 5 April 2013, the reforms 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 reforms to the entire capital gain, or to that part of the gain that accrues after 1 July 2014; and
- For assets purchased from 1 July 2014, the reforms will apply to the entire capital gain.