On 5 April 2013, the Treasurer, the Honourable Wayne Swan MP and the Minister for Financial Services and Superannuation, the Honourable Bill Shorten MP released a press release setting out the Labor Government's proposed changes to the superannuation system to 'improve the fairness, sustainability and efficiency of the superannuation system'.
The changes, which are set out below, include a mix of measures aimed at curbing the concessions available to members with higher account balances and fixes to a number of identified issues with the current system.
Capping the tax exemption for earnings on assets
supporting income streams
The tax exemption for earnings on assets supporting income streams (or pension phase as it is often referred to) is to be capped to the first $100,000 of earnings for each member from 1 July 2014. Any earnings above this amount will continue to be taxed at 15%. Based on a 5% return, the press release notes that the measure would only apply to members with account balances of $2 million plus (of course, if the return was say 10% then it would apply to account balances of $1 million plus). There is no express mention of the discount for capital gains, but presumably that will continue to apply.
Potentially complicated transitional provisions will apply to capital assets to provide time for fund trustees to determine how they will deal with such assets under the new regime. The transitional provisions are:
- For assets acquired prior to 5 April 2013, the new cap will only apply from 1 July 2024 - This will allow time for the trustees to dispose of those assets if they are currently in pension phase or if the fund goes into pension phase before that time.
- For assets acquired from 5 April 2013 to 30 June 2014, the new cap will apply from 1 July 2014 - There will be a choice of applying the new rules to whole of the gain or that part accruing after 1 July 2014. Thus if the fund is currently in pension phase, then such assets can be disposed under the current rules, without a cap, up until 1 July 2014.
- For assets acquired from 1 July 2014, the new cap will apply to those assets.
In addition, the new rules are to apply to defined benefit funds via an actuarial determination.
There is no detail yet as to how the new rules are to be administered by funds, but it is likely to involve further complication and record keeping (especially for funds that hold transitional assets).
For funds and members alike, this measure, if enacted, will mean that a review of all current assets should be undertaken and plans put in place for the holding and disposal of the applicable assets. For some members this could involve comparing the ongoing attractiveness of holding assets in a super fund as compared to other entities.
Higher concessional contribution caps for older
The Government has abandoned its proposed $50,000 concessional cap for members aged 50+ with balances under $500,000 in favour of a simplified proposal. Under the proposal a higher concessional contribution cap of $35,000 will initially apply from 1 July 2013 to all members aged 60+. The higher cap will then apply to members aged 50+ from 1 July 2014.
This new higher cap will not be indexed. The Government expects the 'standard cap' to reach $35,000 from 1 July 2018, therefore effectively having a five-year transition period.
This simplified version is a welcome change, given the potential complexities in the original proposal, though, no doubt, some funds and members will be disappointed with the lowering of the cap (ie to $35,000 rather than the previously announced $50,000 cap).
A 'fix' for excess concessional
In a welcome change, the Government has announced that members will be able to withdraw excess concessional contributions from their fund. The returned excess concessional contributions will be taxed at the member's marginal tax rates plus an interest charge (to recognise the delay in taxing the returned excess contributions).
The measure appears to be voluntary and, therefore, members on the highest marginal tax rate may be better off not applying for their excess concessional contributions to be returned on the basis that they avoid the interest charge if the amounts are retained in the fund.
Disappointingly, this measure does not appear to apply to excess non-concessional contributions.
Account-based pensions to be included in the aged
pension income test
Any account-based pensions commenced from 1 July 2015 will be counted for the purposes of the aged pension income test under the same rules that apply to other investments.
Account-based pensions commenced before that time will continue to be assessed under existing rules. Therefore, affected members who hold such pensions should ensure that such pensions are appropriately quarantined. For example, if new contributions are made post 30 June 2015, then new pensions should be commenced rather than utilising the current common practice of commuting existing pensions in order to commence a new pension with the new contributions.
Concessional tax treatment for deferred lifetime
From 1 July 2014, deferred lifetime annuities are to receive the same concessional tax treatment that superannuation assets supporting income streams receive (ie 'pension phase').
Increase to the cap for 'lost
The cap applying to account balances that trigger 'lost members' is to increase from the recently introduced $2,000 limit to $2,500 from 31 December 2015 and then to $3,000 from 31 December 2016.
Establishment of the Council of Superannuation
The Government will establish a Council of Superannuation Custodians to 'ensure future changes [to the superannuation system] are consistent with an agreed Charter of Superannuation Adequacy and Sustainability [to be drafted]'.
The Council's role will be to draft the Charter, assess future policies against the Charter and table its reports in Parliament. It does not appear as though the Council will have any substantive powers but will act in more of an advisory role, perhaps in a similar vein to the Productivity Commission.
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