|Summary: The Federal Government's announced changes are sweeping, and have wide ramifications for those in industry and corporate superannuation funds, and for those operating their own fund. But the biggest changes will affect those with large fund balances who are not paying tax on their earnings post retirement.|
|Key take-out: The changes underline that once you are 55 you should consider putting your superannuation fund into pension mode.|
|Key beneficiaries: SMSF trustees and superannuation members. Category: Superannuation.|
Those who have used superannuation as their main savings vehicle achieved a great victory as a result of today’s statement.
The Government has not wrecked the superannuation structure but has made it more equitable for the wider community, so it is now much safer.
And given the additional safety, provided you can handle the restrictions to flexibility, superannuation remains the most tax-effective savings mechanism in Australia.
I have already taken up my 2012-13 superannuation contribution entitlement but I was waiting for the announcement before deciding whether to take up my 2013-14 entitlement. I will now do so and, provided you have the cash available, I suggest that Eureka readers do the same thing.
Currently if your superannuation is in pension mode, then both the earnings of the fund and the pension that is paid are tax free and do not affect the tax rate of other income.
For people with largish sums in superannuation (and I am in that bracket) I have always felt that the tax benefit was too high to be sustainable. In recent months I have been suggesting in that the limit be $2 million, which on the basis of a 5% return would provide a tax-free income of $100,000. The government has taken up those base sums and allowed the first $100,000 income for a fund in pension mode to be tax free, and after that it is taxed at 15%. There is no tax on the pension.
At the same time they have made it easier for some people to contribute larger sums (see the attached article from Max Newnham explaining the key points.) The changes underline that once you are 55 you should consider putting your superannuation fund into pension mode but, as I will explain below, there are also changes ahead for that.
While it means extra tax is payable by people like me, I feel not only that it is more equitable, but, as the Coalition is unlikely to adversely change the rules, I feel a sense of long-term security which is worth the extra tax.
However, the speculation of major changes which were based on Treasury leaks has already had an effect on the economy, so I want to take you through some of the events behind the scenes.
During the week I received a note from Australia’s largest apartment builder, Harry Triguboff, pointing out two important trends. Firstly, that investors were returning to the inner-Sydney apartment market and, as they pushed the price of units higher, residential buyers were joining them. Suddenly people are now scrambling to buy property and are not all that fussy about price. This is a dangerous trend because, at the same time, rents have virtually stalled as people are using the apartments more intensively with greater numbers living in the same unit.
If this higher occupation rate trend continues, the shortages of housing that are predicted may not eventuate. The experience of inner-Sydney is not duplicated in all housing markets, particularly in outer suburbs. My guess is that the rise in investment interest in inner-Sydney apartments in part reflected a despair with superannuation. Some investors are using their superannuation fund to gear investment property purchases so as to virtually insulate themselves from the Canberra gymnastics, because their taxable income in a superannuation fund will be reduced if not eliminated. There was also a chance that negative gearing in a superannuation fund could be abolished. As we now know, the negative gearing change to superannuation has not has not been made. I still think it might happen in the next year or two, so if gearing a residential property is the way you want to move then I would move earlier rather than later.
But make sure the property is a good one and you have not over paid.
Meanwhile, this speculative-driven increase in investor and residential buying of apartments and inner-city houses will disturb the Reserve Bank. The last thing it wants is for its interest rate reductions to spark off a speculative housing boom. Australian residences are amongst the highest priced in the world, and the Reserve Bank would be very wary about sparking another major advance. So, in a strange way, the superannuation gymnastics in Canberra might even reduce the flexibility the Reserve Bank has to lower interest rates. That doesn’t mean there won’t be another interest rate cut, but I would be surprised if the Reserve Bank goes much further given what is happening in the housing market.
What made the superannuation debate so bizarre was that everyone was operating on different premises. Treasury put out a statement which said that Australian taxpayers were subsidising superannuation by some $30 billion a year. That statement was a complete nonsense, with gaping mathematical errors that would have been picked up by most Year 7 children. Obviously nobody that read the Treasury statement as fact understood superannuation. Then, not only did Treasury get the mathematics wrong, but it assumed a 7% return when a 5% annual return would be far more realistic. And then it forgot about the tax benefit that comes from reducing dependence on the age pension. With these fictitious sums, Treasury has been canvassing various large superannuation funds saying it is unfair that people on high incomes are getting a much bigger slice of the superannuation concession pie.
And, of course, in this case that’s obviously mathematically correct because people on higher incomes are in fact saving via superannuation to avoid being dependent on the age pension. The benefits that are flowing to people on higher incomes, and who are making big contributions, are in fact benefits that will reduce government pension bills in future years. A great many people on lower incomes are not using superannuation to replace the government age pension. On retirement they take much of their superannuation out in lump sums and use it to pay off their mortgage, go on holidays, and in conjunction with their financial planner work their superannuation to maximise their entitlement to the age pension.
So reducing the ability of people to build up sufficient superannuation so that they are less likely to need the age pension was bad long-term policy. Yet that is the policy that is being advocated by Treasury. I think superannuation minister Bill Shorten played a big role in common sense being adopted
If you are aged 55 or above you should consider very seriously putting your superannuation fund into pension mode. That way the first $100,000 of superannuation income (indexed) will be tax free, but you will still pay 15% on any income above that. It certainly beats personal income tax rates.
But you must distribute money each year, and those distribution amounts are being increased. You can reinvest those distributions back into your fund, although that reduces the amount of new money you can put into the fund. If you have very large sums in superannuation you may choose not to go into pension mode, pay the tax and inject more money into superannuation to gain the benefit of the lower tax rate.
For most people it is best to go into pension mode, but the extra tax now means that for very large superannuation funds, some may prefer to keep increasing the amount in the fund so that it is taxed at rates less than personal income tax. If you go into pension mode on a date other than June 30, you may have to produce two sets of accounts – one on pension mode day and one on June 30. Meanwhile here are the distribution requirements for the current year and in 2013-14.
Distribution Requirement As A Percentage Of Assets
In Pension Mode Superannuation Funds.
55 - 65
65 – 74
75 – 79
80 – 84
85 – 89
90 – 94