Super plan fair and reasonable, but probably won't become law
On balance, the changes detailed in the joint release by Treasurer Wayne Swan and Superannuation Minister Bill Shorten were fair and reasonable. The problem is the legislation is not expected to be introduced until after the federal election. If this is the case, there is a high degree of probability that the changes will never become law.
It does, however, give the Australian electorate a benchmark to compare all other superannuation policies announced in the future.
Tony Abbott's reaction has been disappointing. He appears not prepared to accept any of the changes and has committed to reversing the superannuation tax break to low-income earners.
One of the surprise announcements was a big overhaul of the penalty regime for excess concessional super contributions. Concessional contributions include compulsory super contributions by employers, salary sacrifice contributions by employees, and deductible self-employed super contributions.
Currently, excess concessional contributions - apart from a
one-off ability to have up to a $10,000 excess contribution taxed at an individual's marginal tax rate - are taxed at 46.5 per cent. The excess is then classed as a non-concessional contribution.
This can result - in some cases, where someone had already contributed up to their maximum non-concessional contribution limit - in an individual paying 93 per cent penalty tax on one excess contribution.
The changes announced would result in a fair and equitable system rather than the punitive and harsh system that exists. If introduced, all excess contributions would be refunded to the super fund member and taxed at their applicable marginal tax rate.
Given that the excess concessional contribution system was introduced by a Coalition government under John Howard, and that up until now the opposition has remained silent on how it would fix the excess contributions system, this could become a big point of difference.
The only policy change that would be retrospective is the proposed 15 per cent tax on income earned by superannuation funds paying pensions to the rich.
Currently, no tax is payable on income when investments are used to fund a superannuation pension.
Under the proposed change, where income earned by a superannuation fund paying a pension exceeded $100,000, the excess would be taxed at 15 per cent. The government believes that this will only catch people with superannuation accounts of more than $2 million.
This means Australians who were lured into maximising their superannuation when the new superannuation system began, and have superannuation of more than $2 million, will now be penalised for having done so.
To remove the retrospective nature of this change, the new tax on superannuation income earned would need to be grandfathered. This could be done by the new tax applying from its implementation date to anyone with less than $2 million in superannuation now.
For those with superannuation already in excess of $2 million, the new tax would only apply to income on the percentage increase in the value of their superannuation from the date of the announcement.
Over the coming months it will be interesting to see what policies are released by the other major parties relating to superannuation. Their challenge will be to put forward changes to the current system that will improve its adequacy, sustainability, integrity, and fairness without any retrospectivity.
Frequently Asked Questions about this Article…
The joint release outlined several changes intended to make the system fairer. Key proposals include an overhaul of the penalty regime for excess concessional contributions and a new 15% tax on income earned by super funds paying pensions once that income exceeds $100,000. The government described the overall package as fair and reasonable, and the release gives voters a benchmark to compare future superannuation policies.
Under the proposed changes, excess concessional contributions would be refunded to the super fund member and then taxed at the member’s applicable marginal tax rate. This replaces the current punitive approach, where excess amounts are often taxed at 46.5% (and in some cases can lead to an effective 93% penalty if reclassified as non‑concessional). The change aims to create a fairer and more equitable outcome for members.
Concessional contributions include compulsory employer super contributions, salary sacrifice contributions made by employees, and deductible super contributions made by self‑employed people. These are the types of contributions targeted by the proposed penalty regime overhaul.
Yes. The article states the only retrospective change in the package is the proposed 15% tax on income earned by superannuation funds paying pensions to high‑balance accounts. Currently income used to fund a super pension is tax‑free, but the proposal would tax income above $100,000 per fund at 15%.
The government says the 15% tax on pension income above $100,000 per fund is expected to mainly catch members with very large balances — believed to be people with superannuation accounts of more than around $2 million. The change would primarily affect those who maximised their super under previous rules and now hold very large balances.
Not necessarily. The article notes the legislation was not expected to be introduced until after the federal election, and there is a high probability that the changes may never be legislated. The timing and final outcome will depend on the election and subsequent parliamentary process.
Yes. The article suggests a grandfathering approach to remove the retrospective effect: apply the new tax from its implementation date to people with less than $2 million in super now, and for those already above $2 million limit the tax to the income on the percentage increase in their superannuation value from the date of the announcement.
The article highlights uncertainty because the legislation may be introduced after the election and might not pass. It suggests these proposals provide a benchmark for comparing future policies. Everyday investors should stay informed about further developments, compare announced party policies, and consider seeking personal financial advice if they think the changes could affect their situation.
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