The Federal Government announced this morning its proposed taxation changes to superannuation. Undoubtedly releasing this information before the announcement of the Federal budget in May is in response to the speculation about the Government's plans, and the back lash from virtually all parts of the superannuation industry to some of the proposals being considered.
These changes will be meet with a mixture of relief and concern. Relief that some of the more radical, and in some cases retrospective, changes have not eventuated. Concern because any further changes to superannuation will not be welcomed by an industry struggling to meet compliance deadlines for the Stronger Super and FOFA reforms. This is especially so as some of these further proposed changes will apply from 1 July 2013.
Tax on earnings of incomes streams
Tax exemptions for earnings on assets supporting income streams for those aged 60 and above will be capped at $100,000 and indexed to the Consumer Price Index increasing in increments of $10,000. Tax on earnings above this cap will be 15%. This will apply from 1 July 2014.
This change applies to accumulation and defined benefit pensions. For defined benefit pensions it will apply by calculating notional earnings each year for defined benefit members receiving concessionally taxed superannuation pensions. This will add to the cost of administration of all pensions especially defined benefit pensions where actuarial calculations will be needed to measure notional earnings. This may be the case even where very few or no pensioners are likely to exceed the cap.
It remains to be seen how the issue of multiple pensions will be dealt with. It is not currently possible for members to contribute into an account based pension. They have to start a new pension if they want to increase their income from this source. Trustees will only be aware of the level of pensions payable from their fund. Presumably the ATO will need to monitor this through individual's income tax returns.
Special arrangements will apply for capital gains on assets purchased before 1 July 2014 to ensure those who have purchased superannuation assets have ten years to decide whether to restructure their superannuation holdings, before capital gains tax stats to be affected.
The transitional arrangements are as follows:
- assets purchased before 5 April 2013 – reforms apply only to capital gains that accrue after 1 July 2024;
- assets purchased from 5 April 2013 to 30 June 2014 – pensioners have a choice between applying the reforms to the entire capital gain, or only that part that accrues after 1 July 2014; and
- assets purchased from 1 July 2014 – reform applies to entire capital gain.
Lump sum withdrawals will continue to remain tax free for those aged 60 and over. This promotes lump sum withdrawals rather than income streams which is counter productive even if there are a limited number of people these changes will impact.
Concessional contributions tax
Changes to the cap on concessional contributions are as follows:
- From 1 July 2013 those aged 60 or over will have an unindexed cap on concessional contributions of $35,000.
- Those aged 50 and over will be able to access this higher cap from 1 July 2014.
- The general concessional cap is expected to reach $35,000 from 1 July 2018.
The restriction on balances above $500,000 preventing access to the higher cap will not go ahead.
Ironically this is presented as simplifying the design and administration of the higher concessional contributions cap. For those administering this change it will be anything but simple.
Concessional contributions exceeding the cap
To address what has been a harsh penalty on members inadvertently exceeding the cap on concessional contributions changes are proposed to allow members to withdraw excess concessional contributions made from 1 July 2013. Excess concessional contributions will be taxed at marginal tax rates plus interest. The intention is that the tax incurred will be the same as the member would have paid if they had taken the excess contribution as salary.
Changes to deeming rules
Normal deeming rules will be extended to superannuation account-based income streams for purposes of the pension income test. This will apply to new account based income streams after 1 January 2015. Grandfathering will apply to products held before 1 January 2015 which will continue to be assessed under the existing rules, provided the pensioner does not change products.
Extending concessional tax treatment to deferred lifetime annuities
Concessional tax treatment for superannuation assets supporting income streams will be extended to deferred lifetime annuities from 1 July 2014. This is to encourage the take-up of deferred lifetime annuities and a long awaited reform.
Changes to lost super arrangements
ATO will pay interest on all lost superannuation accounts reclaimed at a rate equal to the CPI.
The account balance threshold at which inactive accounts and accounts of uncontactable members are required to be transferred to the ATO will increase from $2,000 to $2,500 from 31 December 2015, and $3,000 from 31 December 2016.
Council of Superannuation Custodians
A Council of Superannuation Custodians will be established to ensure any future changes are consistent with an agreed Charter of Superannuation Adequacy and Sustainability. The Charter will outline core objects, values and principles of the Australian superannuation system. The Council will assess future policy against the Charter and provide a report for tabling in Parliament.
Membership of this Council will be finalised following public consultations.
A Charter Group will be established to develop the Charter and establish the Council.
No doubt there will be robust lobbying for membership of the Group and the Council. Given the lack of unity within the superannuation industry the various lobby groups will want to be represented. However, it remains to be seen if this Council is just another layer of bureaucracy for which the industry will be required to pay, or if it will have real influence over outcomes. Without bi partisan support for the Council and the Charter neither may survive past the Federal election in September.
These changes will provide challenges for trustees from an administrative perspective and with some of them applying from 1 July 2013 adds to the significant compliance burden funds are already facing in relation to the Stronger Super and FOFA reforms.
The industry is reaching breaking point and its pleas to allow the industry time to consolidate the substantial reforms currently being implemented has obviously fallen on deaf ears. It seems that the industry is doomed to continuous change driven by political agendas regardless of which party holds Government.
While these changes are not as bad as originally contemplated they will still impose further cost on funds to implement and administer. Those costs invariably are borne by members retirement savings.
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.