There has been much speculation on who would be hit by a higher tax on their superannuation contributions after the government said it would announce measures in the budget on Tuesday. Now we know it will be those earning more than $300,000 a year who will pay 30 per cent tax on their salary sacrifice and on their compulsory contributions instead of the 15 per cent that will continue to apply to everybody else.
The impost on the very well off has produced a strong reaction from lobby groups representing the superannuation industry. It revives memories of Peter Costello's surcharge on super that was started in 1996. It was an extra 15 per cent in contributions tax for those earning more than $85,000 a year, though it started kicking in at incomes of $70,000. The former treasurer has conceded that it was a mistake because of the difficulty of its administration. The surcharge was dropped in 2005.
We will have to see if the experience of the Howard government has not been lost on the Gillard government and the Tax Office will be better prepared to administer the surcharge this time.
On incomes of $300,000 a year, this tax impost starts at a much higher income than the old surcharge and affects only the top 1.2 per cent of taxpayers, about 128,000 people.
The truth is that many of the senior executives, senior professionals and successful small business people are well able to afford a very comfortable retirement without any tax incentives at all. The better off, naturally, make much more use of the super tax concessions than other taxpayers.
The Rudd government brought in caps on how much can be salary sacrificed into super, which already goes a long way to addressing the equity problem - where taxpayers subsidise the retirements on the very well off.
The cap currently on salary sacrifice into super is $25,000 for the under-50s and $50,000 for those 50-plus and that includes the 9 per cent compulsory super. But the $50,000 cap will drop to $25,000 from July 1 this year for the older group, except for those with less than $500,000 in super, pending the measures being passed by Parliament.
The government could have more to say on the caps in its budget.
Frequently Asked Questions about this Article…
Who will be hit by the higher tax on superannuation contributions?
People earning more than $300,000 a year will pay a 30% tax on their salary sacrifice and on compulsory super contributions, rather than the usual 15% that applies to other taxpayers.
How many taxpayers will be affected by the new 30% super contributions tax?
The change affects only the top 1.2% of taxpayers — roughly 128,000 people — because the $300,000 threshold targets very high earners.
Will both salary sacrifice contributions and compulsory super be taxed at 30% for high earners?
Yes. For those earning over $300,000 a year, both salary-sacrificed amounts and the compulsory employer contributions will be taxed at 30%, instead of the standard 15%.
What are the current caps on salary sacrifice into super and how are they changing?
Current caps: $25,000 for under-50s and $50,000 for people aged 50-plus (these amounts include the 9% compulsory super). From July 1 the $50,000 cap for the older group will drop to $25,000, except for people with less than $500,000 in super, pending passage of the measures through Parliament.
Why is the government introducing a higher contributions tax for very high earners?
The article says the move is aimed at addressing equity concerns — reducing taxpayer subsidies that disproportionately help the very well off, who make greater use of super tax concessions.
Is this new surcharge similar to the old super contributions surcharge from the 1990s?
It revives memories of the surcharge introduced under Peter Costello in 1996, which added an extra 15% on contributions for people above certain income levels. That surcharge proved hard to administer and was dropped in 2005.
Could administration problems that affected the old surcharge be a risk again?
The article notes that administration was the main reason the earlier surcharge was abandoned, and it remains an open question whether the Tax Office and the current government are better prepared to administer this levy successfully.
Will the government say more about superannuation caps in the coming budget?
Possibly. The article suggests the government could have more to say on caps in its budget, so further details or clarifications may be announced then.
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