Super: Proposed Government Changes

by Melanie Dunn, Actuarial Analyst with Bendzulla Actuarial

Finally, we have an announcement from the Government after weeks of speculation concerning changes to super. We have read the press release and a few early reports and thought this was a good summary.

15% Tax on Earnings over $100,000

The government have announced a restriction on the tax concessions available in pension phase. From 1 July 2014, future earnings (such as dividends and interest) on assets supporting pensions will be tax free up to $100,000 a year for each individual. Earnings above $100,000 will be taxed at the same concessional rate of 15% that applies to earnings in the accumulation phase.

This $100,000 threshold will be indexed annually with CPI and will increase in $10,000 increments.

The government has indicated that this reform is expected to affect only around 16,000 Australians who have balances around or above $2,000,000.

Special provisions will apply to capital gains incurred on assets purchased prior to 1 July 2014:

  • 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; and
  • For assets purchased from 1 July 2014, the reform will apply to the entire capital gain.

Persons therefore have approximately ten years to determine how they will restructure their super assets to account for the new reforms.

These new reforms will not affect the taxation of super withdrawals, these continue to be tax free after age 60.

In addition, the government has advised that this new reform will apply to defined benefit funds. As a defined benefit funds often do not actually earn income (but are paid from government revenue for example) this will be achieved by calculating the notional earnings each year for defined benefit members who receive a concessionally-taxed pension. The calculation will be based a calculation completed by an actuary. Where a person’s notional yearly earnings as calculated by an actuary exceed the $100,000 threshold, the amount in excess of $100,000 will be subject to tax at a rate of 15 per cent.

Other superannuation reforms

The government also announced a number of other super reforms including:

  • Simplify the design and administration of the higher concessional contributions cap;
  • Reform the treatment of concessional contributions in excess of the annual cap;
  • Extend the normal deeming rules to superannuation account-based income streams;
  • Extend concessional tax treatment to deferred lifetime annuities; and
  • Further reform the arrangements for lost superannuation.

These reforms in addition to those mentioned above is estimated to save around $900 million over the forward estimates period.

In particular, to SMSFs some points mentioned by Senator Bill Shorten at the media conference include:

  • the government announced an increase to the concessional contributions cap for those aged over 60 at 1 July 2013 to $35,000 with this increase extended to those persons aged over 50 at 1 July 2014.
  • excess concessional contributions will be able to be withdrawn from the fund by the member and will be taxed at the individual’s marginal tax rate (plus an interest charge) not the top marginal tax rate.
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