|Summary: The Federal Government today announced a series of superannuation changes, including a higher contributions cap for people aged over 60 from July 1, a tax-free earnings cap of $100,000 for individuals in retirement, and reforms to excess contributions tax. The changes have mainly been designed to affect individuals with super fund balances of $2 million or more.|
|Key take-out: In addition to changes to superannuation contributions and tax-free earnings, the special treatment for capital gains made in a super fund will no longer apply depending on when assets were purchased.|
|Key beneficiaries: SMSF trustees and superannuation members. Category: Superannuation.|
The Federal Government today unveiled a series of planned changes to superannuation legislation, which it said would save $900 million off the budget’s forward estimates. Below is a detailed summary of the key measures that were announced by the superannuation minister, Bill Shorten.
- From one July 2014, the income earned by superannuation funds from investments that support the paying of a pension will be taxed at 15%, when the income of the fund exceeds $100,000.
Currently all income earned by a superannuation fund from investments related to a pension account are 100% tax free to the super fund. For a fund with $2 million in assets earning 5%, no tax would be payable. If a fund is earning 6.5%, the total value of the investments could not exceed $1,538,462. Only the income earned above $100,000 will be taxed at 15%.
- The $100,000 cap will be increased in line with the Consumer Price Index, but will increase in $10,000 increments.
Increasing the $100,000 in $10,000 increments is applying a principle started by Peter Costello when the new simple super system started. The concessional contribution caps are also meant to increase in line with CPI increases, but in $5,000 increments. With the CPI of 3% this would mean the $100,000 limit would not increase until four years had elapsed.
- The special treatment for capital gains made in a super fund will no longer apply, depending on when the asset was purchased.
- Assets purchased before April 5, 2013 will continue to have existing taxation rules applying to them until July 1, 2024. Any capital gains made after July 1, 2024 will be taxed under the new arrangements.
- Trustees will have the choice for assets purchased from April 5, 2013 to June 30, 2014 to either be taxed under the new capital gains tax rules applying to superannuation funds, or only the increase in the value after July 1, 2014.
- Assets purchased after July 1, 2014 by super funds will be taxed under the new regime.
Capital gains made by superannuation funds in accumulation phase are effectively only taxed at 10%. This is because a one-third discount is applied to the capital gain made, thus reducing the 15% tax that would have been payable down to 10%. Capital gains made by a super fund in pension phase are not taxed. As result of this change, where a capital gain increases the income earned by a super fund in pension phase the excess capital gain over 100,000 will be taxed at 15%.
- The government will increase the concessional super contribution limit for people aged 60 and over from July 1, 2013 to $35,000. The concessional cap for people aged 50 and over will increase to $35,000 from July 1, 2014. This concessional cap will not increase in line with the CPI. The increase will not be limited to people with super balances below $500,000.
Prior to this change the concessional contribution caps for people of all ages was $25,000. Under the old superannuation system, before the new simple super system started from July 1, 2007, a three-tiered contribution limit system applied depending on a person’s age. Those limits were $15,260 for someone aged under 35, $42,385 for someone aged 35 to 49, and $51,130 for someone aged 50 and over.
- Where excess concessional contributions are made, individuals will be able to withdraw the excess component and pay tax at their marginal rate of tax.
When an excess concessional contribution is made under the current rules, it is taxed at 46.5%, and the excess contribution is then classed as a non-concessional contribution. This can result in this contribution cap also being exceeded. There is relief under the current system when an excess contribution is made for the first time up to a limit of $10,000. Under this relief the excess contribution is refunded and taxed at the applicable marginal rate.
- A change will be made to the treatment of how superannuation is treated by Centrelink when it comes to applying the income test. From January 1, 2015, the deeming rates will be applied to the value of not only superannuation that is in accumulation phase but also to superannuation accounts in pension phase. Where a superannuation pension is commenced prior to January 1, 2015 the old rules will apply.
Under the current income test applied by Centrelink deeming rates of income are applied to someone of pension age when they have a superannuation account still in the accumulation phase. Where a person takes a pension from their superannuation the deeming rules are not applied, and instead Centrelink counts the value of the pension received after deducting the purchase price of the pension.
This has been a time-honoured principle applied to all pension incomes received. As it is expected that at some point in time a member will commence to draw down their capital, they have always been allowed a deduction from the pension income received. The deduction is currently calculated by dividing the value of a person’s superannuation account at the time they start the pension by their life expectancy.
Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.