Those boffins in Treasury who dislike super have had their way and to find savings, the Government has axed the ‘over fifties, fifty thousand concessional cap for super balances under $500,000’. I hate to say it, but I foreshadowed this in Budget preview: five potential changes to the cap – it was just going to be too complicated to administer and it was an easy saving.
Everyone’s concessional cap is now $25,000 from 1 July, 2012.
Forget talk of a ‘two year deferral’; this proposal will never see the light of day again. The best outcome will be if the promised indexation of the concessional cap finally occurs and it is increased to $30,000 in 2014/15.
There are also three other changes that could impact you from 1 July.
1. Additional 15% tax on concessional contributions for high-income earners
Widely telegraphed in advance of the budget, those earning more than $300,000 a year will have their concessional contributions taxed at 30% rather than the standard 15%. What wasn’t covered was the actual definition of ‘income’ – it is not a simple $300,000.
Firstly, concessional contributions (your employer’s contribution, salary sacrifice contributions and contributions by a self-employed person claiming a tax deduction) will count as income. For example, if your taxable income is $280,000 and your employer makes $25,000 in concessional contributions, you will trigger the threshold because your income will be assessed as $305,000.
$280,000 + $25,000 = $305,000
The additional tax of 15% (30% in total) will apply to those concessional contributions that take your income over $300,000, which in this case is on the extra $5,000.
More importantly, income includes investment losses. For example, losses on borrowing money to buy shares or from negatively geared property. Technically, the definition of ‘income’ is:
taxable income + concessional contributions + adjusted fringe benefits + total net investment losses = income
This is going to catch a few people out (I guess a lot more than Treasury’s forecast of 128,000). Let’s take an example. Assume your taxable income is $200,000, which has been calculated after deducting a net $90,000 loss on three investment properties. You also receive $10,000 in fringe benefits, and your employer makes super contributions of $18,000.
Under this measure, your income is:
As you can see, your total income is $18,000 above the $300,000 income trigger, which means your concessional contributions will now be taxed at 30% instead of 15%.
Another issue that arises is, who collects the additional tax? Although there will no doubt be industry consultation, the Government has foreshadowed that in the SMSF sector, each fund will be responsible for collecting the additional tax. Trustees will need to obtain records of their members’ income.
2. Government co-contribution reduces to $500 max
Announced a few months’ back, but not given a lot of coverage, the government co-contribution reduces to a maximum of $500 for a low-income earner who makes a personal super contribution. The matching rate also reduces to 50%, so to get the maximum $500 co-contribution, the personal super contribution will need to be $1,000.
There is no change to the income threshold (the person’s income has to be under $31,920 to get the maximum co-contribution), however as the benefit has been cut to $500, it phases out completely once the person’s income exceeds $46,920.
3. Low income earners won’t pay contributions tax
The one positive change (again announced a few months’ back) is the Low Income Superannuation Contribution (LISC). Effectively, a person whose income is less than $37,000 will have the contributions tax on concessional contributions returned to the fund, meaning they won’t pay any contributions tax. Worth a maximum of $500 (15% of 9% of $37,000), the Australian Taxation Office (ATO) will generally pay the LISC to the superannuation fund.
Like the co-contribution, a key eligibility requirement is that at least 10% of the person’s income must come from employment.
Actions to take before 30 June
If you are over 50 and eligible to make contributions, this is the last chance to take advantage of the higher $50,000 concessional contributions cap. Talk to your employer about salary sacrificing, or if self-employed, make tax-deductible contributions. You have until 30 June – don’t exceed the cap!
The Government Co-contribution is still $1,000 in 2011/12, and the matching rate is 1:1. If you have a low-income spouse, or adult children who work part time, consider ‘arranging’ a personal contribution of $1,000 to their super fund. The maximum benefit is payable if the person’s income is under $31,920 – in 2011/12, it phases out completely once their income exceeds $61,920. At least 10% of their income must come from employment.
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