After months of speculation, the Gillard Government today announced changes to superannuation ahead of the forthcoming Federal Government budget.

Summary

The key changes announced include:

  • the capping of tax-free earnings on income streams to $100,000 per annum (above which earnings will be taxed at the same rate as earnings in the accumulation phase, currently up to 15%).  Measures will be put in place to ensure that tax-free earnings on defined benefit pensions will also be subject to a similar threshold of $100,000 per annum;

  • the increase of the concessional contributions cap to $35,000 per annum for people aged 50 or over; and

  • the ability for individuals to withdraw excess concessional contributions and have them taxed at their marginal rates (plus an interest charge).

Analysis

Reforming the tax exemption for earnings on superannuation assets supporting income streams: from 1 July 2014, the tax exemption for earnings on superannuation assets supporting income streams will be capped at $100,000 per annum for each individual. Earnings on assets supporting income streams will be tax free up to $100,000 a year for each individual, and earnings above $100,000 will be taxed at the same concessional rate of 15 per cent that applies to earnings in the accumulation phase.

Transitional arrangements will apply to capital gains on assets that exceed the $100,000 cap (in conjunction with any other fund income) as follows:

  • assets purchased before 5 April 2013 will be taxed on capital gains that accrue from 1 July 2024;

  • assets purchased from 5 April 2013 to 30 June 2014 will be taxed on the proportion of the capital gain that accrues after 1 July 2014; and

  • assets purchased from 1 July 2014 will be taxed on the entire capital gain.

The same treatment will apply to defined benefit pensions by calculating the notional earnings each year for defined benefit members in receipt of a concessionally-taxed superannuation pension (using actuarial calculations which will be based on the size of the person's superannuation pension and their age).  Where a person's notional yearly earnings exceed the $100,000 threshold, the amount in excess of $100,000 will be subject to tax at a rate of 15 per cent.

Changes to the concessional contributions cap: an unindexed $35,000 concessional cap will apply to anyone who meets certain age requirements. The start date for the new higher cap will be brought forward to 1 July 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 1 July 2014. (The Government has decided not to limit the new higher cap to individuals with superannuation balances below $500,000).

Excess contributions: members will be allowed to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund. The excess concessional contributions will 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.  Individuals will therefore be 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.

Extending the deeming rules for age pension to superannuation account-based income streams: for the purposes of the pension income test, standard pension deeming arrangements will 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 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. 

Extending concessional tax treatment to deferred lifetime annuities: from 1 July 2014, the same concessional tax treatment will apply to deferred lifetime annuities as currently applies to superannuation assets supporting income streams.

Lost Super: the account balance threshold (below which inactive accounts and accounts of uncontactable members are required to be transferred to the ATO) will increase to $2,500 from 31 December 2015 and to $3,000 from 31 December 2016.

Council of Superannuation Custodians: the Government will establish a Council of Superannuation Custodians to ensure that any future changes are consistent with an agreed Charter of Superannuation Adequacy and Sustainability.  The Charter will be developed against the principles of certainty, adequacy, fairness and sustainability, and will clearly outline the core objects, values and principles of the Australian superannuation system.

Concluding comments

The good news is the measures announced to alleviate the penalty tax on excess concessional contributions.  Individuals will be able to withdraw the excess contributions from their fund and have them taxed in their hands as ordinary income.

The bad news is the taxation of income streams: it seems odd that a Federal Government purportedly committed to encouraging Australians to save more for their retirement would seek to apply an additional layer of tax to those same people when they access their retirement savings through an income stream.  The Federal Government will claim that most ordinary Australians will not generate $100,000 per annum in earnings when in pension phase.  However, for self-funded retirees, the measure is yet another cause to consider whether their savings are best placed in superannuation.

For trustees already struggling to cope with the implementation of MySuper, SuperStream and the Future of Financial Advice, there are further operational issues to consider, some of which would start as soon as 1 July 2013.

It is important to note that, although these proposed changes have been announced, they are not yet law.