In a move which was not anticipated, the Government has decided to downsize (or to adopt the Government's euphemism, "better target") the tax concession provided in respect of employment termination payments ("ETP").
The Government has announced the ETP tax offset will only apply in respect of that part of a person's ETP which takes the person's total annual taxable income (including the ETP) to $180,000. Where it applies, the ETP tax offset ensures that the ETP is taxed at a maximum rate of 15% for those over the preservation age, and 30% for those under that age. The new "whole-of-income" cap is intended to complement the existing ETP cap ($175,000 in 2012-13, indexed).
The Government has announced grandfathered concessions for certain ETPs relating to genuine redundancy invalidity, death and employment related disputes. Much interest, clearly, will be in the grandfathering provisions. As presently expressed it would appear that notice period payments could potentially lose tax concessional treatment – a situation exacerbated by the inclusion of lump sum leave payments in a person's taxable income.
Clearly, this move will cause much consternation for taxpayers.
Increase in tax payable on superannuation contributions for high income earners
The Government has announced that from 1 July 2012 individuals with income over $300,000 will have 15% more tax levied on all their concessional superannuation contributions, including their employer contributions and notional taxed contributions for defined benefit members. This change will bring the effective total tax rate on those contributions up to 30%.
For the purpose of this measure, a taxpayer's "income" will include concessional superannuation contributions. It will also include taxable income, adjusted fringe benefits, tax-free Government pensions and benefits (other than child support), some foreign income and net investment losses.
There will be phase-in rules for individuals whose "income" exceeds the $300,000 threshold only because of the inclusion of their concessional contributions as income – in that case only the excess over that threshold is subject to the extra 15% tax. It is questionable whether this will soften the blow significantly.
The Government has also recognised that concessional contributions in excess of the existing $25,000 cap applicable to such contributions are already subject to at least another 31.5% tax (ie, at least an effective total tax of 46.5%). This measure will not increase the total tax on excess concessional contributions.
The Government has not specified whether the individual or fund will pay the extra 15% tax on the contributions, and Treasury will consult on this and other details.
It remains to be seen what consequential changes will be made including whether, for example:
- employer PAYG statements will be expanded to also report total employer contributions made, in addition to the current reporting of reportable employer superannuation contributions;
- the extra 15% tax paid on the contribution will be taken into account in calculating the anti-detriment (tax saving) amount that can be paid by the fund to increase lump sum death benefits to most dependents; and
- tax on benefits drawn from the fund before age 60 will be limited to 16.5% where the contribution that supports the benefit paid has already been taxed at 30%. (Currently pension benefits drawn before age 60 can be
- taxed at 31.5%, and lump sums drawn may be taxed at 21.5% in some
For defined benefit members, issues will include whether:
- grandfathering is extended to this extra 15% tax, as it is for the 31.5% excess concessional contributions tax; and
- special allowance will made to allow payment of the tax to be funded.
Deferral of the extension of the $50,000 concessional contribution
In the 2010-11 Budget the Government announced that individuals aged 50 or over with less than $500,000 of superannuation savings would continue to be allowed a $50,000 concessional contribution cap when the current transitional cap allowed for all individuals aged 50 or over expires on 30 June 2012.
The commencement of that measure will now be deferred until 1 July 2014. Therefore, from 1 July 2012 to 30 June 2014 the standard $25,000 cap will apply to all individuals. From 1 July 2014, the concessional contribution cap will then increase to $50,000 for individuals aged 50 or over with less than $500,000 of superannuation savings.
Successor fund CGT and loss relief
On 24 April 2012, the Government announced that it will extend capital gains tax loss relief for mergers of complying superannuation funds to 1 July 2017. This extension will coincide with the new MySuper reforms being introduced by the Government in order to encourage fund mergers that lower fees and costs for members.
From 1 June 2012 to 1 July 2017, the Government will provide optional loss relief for mergers of complying superannuation funds on the same terms and conditions as the former temporary loss relief, with some exceptions, including an optional roll-over for capital gains and appropriate integrity measures.
The integrity measures will include:
- losses transferred to the receiving fund will be treated as having been made in the income year that they were transferred. This will prevent the successor superannuation fund from using the losses to offset gains in earlier income years; and
- losses realised in the 12 months prior to a merger from the disposal of assets from a transferring fund to a fund that becomes the successor fund in a merger, where those assets are still held by the successor fund, will not be able to transferred to the successor fund. This will prevent the transfer of losses in respect of asset disposals from the transferred fund to the successor fund, which would in effect provide early access to losses in respect of an asset which continued to be held by the successor fund.
In addition, the Government will also provide from 1 July 2013 to 1 July 2017, an optional roll-over and loss relief for capital gains and capital losses on mandatory transfers of default members' benefits and relevant assets to a MySuper product in another complying superannuation fund.
The relief will not extend to self-managed superannuation funds as the MySuper requirements do not apply to them.
A Proposals Paper will be released in the coming weeks and the Government expects the legislation to be introduced into Parliament in the second half of this year. Exposure Draft legislation is expected to be released shortly after the Government consultation on the policy design is complete.
- Australia's Budget 2012-13: Business tax changes
- Australia's Budget 2012-13: International tax
- Australia's Budget 2012-13: Personal income tax changes
- Australia's Budget 2012-13: Goods & Services Tax (GST)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Greenwoods & Freehills are the winners of the 2011 BRW Client Choice Awards.