After all the fuss, only a few will feel the big pinch
At last, the phoney battle on super is over. Now that the government has spelt out how it intends to reform retirement savings, the real political war will begin.
Opposition Leader Tony Abbott has come out with the opening blast, saying reforms are "shades of Cyprus" and a "raid on people".
But putting the political hyperbole to one side, the truth is that new tax imposts announced on Friday will not affect most people. They can go on saving for super in the knowledge that, for them, nothing has changed.
The reforms are targeted at limiting the tax deductions for those with incomes of more than $300,000 a year and those retirees with superannuation account balances of more than $2 million.
The biggest proposed reform is the limit to the tax-free earnings of those with very big superannuation balances once they are in retirement.
Everyone accumulating their super pays a tax on earnings of 15 per cent. Once in retirement, however, there is no tax on earnings.
The government will allow those in retirement to have tax-free earnings on their superannuation investments of up to $100,000 a year. But each dollar of earnings over $100,000 will be taxed at 15 per cent.
According to the government, the change will only affect those in retirement with a super balance of about $2 million or more, or about 16,000 people.
The government has also confirmed that those earning more than $300,000 a year will have to pay 30 per cent contributions tax instead of the 15 per cent paid by everyone else. That will affect about 128,000 people.
The big change that will be of interest to most people is that everyone over 50 (from July 1 next year) will be able to salary sacrifice up to $35,000 a year in super instead of $25,000. The cap is not as generous as it appears because it includes the 9 per cent superannuation guarantee. Someone on $100,000 a year, for example, receives $9000 a year in superannuation guarantee, leaving a real cap of $16,000 a year to make salary sacrifice contributions. With a cap of $35,000, the same person, assuming they're over 50, would be able to make salary sacrifice contributions of $26,000 a year.
It allows those who have some spare money, perhaps after the children have finished school, to build their retirement account balances in the years they have left in the workforce until retirement. The start date for the new higher cap will be brought forward to July 1 this year.
There will also be a streaming of "deemed" rate of earnings for social security benefits, such as the age pension. For calculation of the age pension, a retiree's investments are deemed to have earned a certain rate of interest regardless of the actual interest rates earned.
The deemed earnings are important because the more the retiree is deemed to have earned, the less their age pension payments could be under the social security income test. The deeming rates that are calculated on retirement saving are more generous than deeming rates that apply to assets held outside super.
The government will make uniform the calculation of deeming rates, with the result that many of those drawing a private pension will be reporting a higher deemed income to CentreLink. This could result in a cut in their age pension.
Early indications are there will be no change in pension payments for those with less than about $600,000 or $700,000 in super savings.
Frequently Asked Questions about this Article…
The reforms target a relatively small group. Key changes include limiting tax-free investment earnings in retirement to $100,000 a year (with earnings above that taxed at 15%), applying a 30% contributions tax to people with incomes over $300,000 (instead of the usual 15%), raising the concessional cap for people over 50 to $35,000 a year, and making deeming rates for social security calculations uniform. The measures are aimed mainly at high-income earners and people with very large super balances.
Under the change, retirees can have up to $100,000 a year of tax‑free earnings inside their super. Any investment earnings above that $100,000 threshold will be taxed at 15%. The government says this will mainly affect retirees with super balances of around $2 million or more.
According to the government, the $100,000 tax‑free earnings cap will only affect retirees with roughly $2 million or more in super — estimated to be about 16,000 people. Most members with smaller balances won’t be impacted by that particular measure.
Yes. People with incomes above $300,000 will face a 30% contributions tax on concessional (pre‑tax) super contributions instead of the usual 15%. The government estimates this will affect about 128,000 people.
The concessional (salary sacrifice + employer) cap for people over 50 has been increased to $35,000 a year. That cap includes the 9% superannuation guarantee. For example, someone on a $100,000 salary receives $9,000 in employer super, leaving $26,000 available for salary sacrifice under the new $35,000 cap (compared with a much smaller room under the previous $25,000 cap). The government brought the start date for the higher cap forward to July 1.
The government will make deeming calculations uniform. This means some retirees drawing a private pension may be deemed to have earned a higher income for Centrelink purposes, which could reduce their age pension under the income test. Early indications are that people with less than about $600,000–$700,000 in super savings should see no change to pension payments.
No — most people won’t notice a change. The reforms are targeted at high earners and those with very large super balances. For the majority of savers, contributions and retirement saving arrangements remain largely the same.
The government estimates around 16,000 retirees with roughly $2 million-plus in super could be affected by the $100,000 tax‑free earnings cap, and about 128,000 people earning more than $300,000 a year will face the higher 30% contributions tax. Most other members are expected to be unaffected.
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