Still a super slug – if ever legislated

Co-founder of the Switzer Report
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If the Government’s latest set of changes to the super system are ever legislated, they will raise more than the forecast $900 million. Many more retirees will be caught out by the new tax on pension earnings.

The “good” news first on contribution caps

Surprisingly, it is not all bad (on paper) – so let’s start with the “good” news.

The concessional contributions cap is being increased from $25,000 to $35,000 for those over 60 from 1 July, and for those over 50, from 1 July 2014. Concessional contributions include the compulsory employer contribution of 9%, salary sacrifice and for the self-employed, contributions for which a tax deduction is claimed.

The concessional contributions cap will now apply as follows:

Quietly, the Government has shelved the previous proposal for a $50,000 cap for those with account balances under $500,000, which is why the changes to the caps as a whole result in a net saving for the Government of $365 million!

Pensioners with high balances to pay tax

The tax exemption that applies to investment income on assets supporting superannuation pensions and annuities will, from 1 July 2014, only apply to the first $100,000 per individual. Income in excess of $100,000 will be taxed at 15%.

While the Government says that this will only impact the “fabulously rich”, who have superannuation account balances of $2 million or more, they have assumed a very conservative earnings rate of 5% per annum. Many SMSFs target (and achieve over the longer term) earnings rates well in excess of 5% – so the number of individuals the change is expected to hit will likely be a lot higher than the 16,000 individuals the Treasury estimates. An 8% return will put an account balance of $1.25 million in reach – a 10% return will impact an account balance of $1,000,000 – hardly “fabulously wealthy”.

A large one off capital gain could also impact lower account balances.

Indexation commitment can’t be trusted

The Government says that the $100,000 threshold will be indexed to the CPI, in increments of $10,000. Does this sound familiar?  ‘We will index the concessional contributions cap of $25,000 in increments of $5,000’ – stated in 2007 – and never yet indexed. Three times since deferred!

When it comes to superannuation and indexation commitments, the Government has zero credibility. Time will only tell whether this commitment will be honoured.

Tax on pension investment income will trigger capital gains tax liabilities

The $100,000 threshold for tax on pension income will now mean that the disposal of an asset inside the pension phase will be liable to capital gains tax. Technically speaking, it always has been liable – there just hasn’t been any tax to pay when the tax rate was 0%.

Fortunately, this change is only being introduced prospectively and won’t apply to any existing asset for another 11 years – that is, until 1 July 2024. So, if you purchased the assets before 5 April, they can be sold at any time prior to 1 July 2024 and if they are supporting a pension, they will remain free of any capital gains tax.

Importantly, If you do trigger the threshold and have to pay capital gains tax (for example, with an asset purchased from 5 April 2013), the effective tax rate on the excess will generally only be 10% (as only two thirds of the gain is included on an asset held for greater than 12 months).

Like all changes where “grandfathering” is being applied and which have effective start dates, there are some transitional rules:

  • For assets purchased before 5 April 2013, tax will only apply to gains that accrue after 1 July 2024;
  • For assets purchased from 5 April 2013 to 30 June 2014, you can choose to apply the tax to the whole gain, or just that part that accrues after 1 July 2014; and
  • For assets purchased from 1 July 2014, the entire capital gain will potentially be taxable.

What they didn’t change

Despite the speculation, the Government didn’t change:

  • the $300,000 individual income threshold for when the tax rate on concessional contributions increases from 15% to 30%; (income is defined as taxable income plus concessional contributions plus fringe benefits plus net investment losses);
  • didn’t outlaw transition to retirement pensions – although they will be less attractive for higher account balances if the excess investment income is to be taxed;
  • didn’t legislate that the transition from accumulation to pension phase be an automatic ‘disposal’ for CGT purposes – although the actual disposal of an asset in pension phase may now trigger a CGT liability.

No fine print

This announcement was rushed – three press releases, however no accompanying explanatory memorandum. Important items such as how the tax on earnings is applied if a pensioner is a member of multiple funds, whether or not the income threshold of $100,000 is on a “gross basis” or net of deductions, and the impact (if any) of changes to the concessional caps on the non-concessional caps are examples of questions not answered. As usual, the devil may yet be in the detail, and if the Government is defeated on September 14, many of these proposed changes may never see the light of day.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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