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Liz Westover, at the Institute of Chartered Accountants in Australia observed:
...there were no real wholesale changes announced. In fact, the government was quite deliberate about where the reforms were targeted. The announcements today are not guaranteed to pass through to legislation prior to the September election, so we may still have a period of uncertainty. However, at least now we know the government’s policies on super leading up to the election.Council of Superannuation Custodians
- Establishment of a council of superannuation which will be responsible for ensuring future policy changes regarding superannuation are in line with a new superannuation charter outlining the core values and principles for superannuation policy in Australia.
- This council will aim to ensure that superannuation policy is not driven by the annual political budget cycle but instead focuses on the longevity of superannuation to ensure certainty in the superannuation system for all generations of Australians.
15% Tax on Earnings over $100,000
This is the aspect which has attracted most attention by commentators. It comprises:
- a restriction on the tax concessions available in pension phase. From 1 July 2014, future earnings (such as dividends and interest) on assets supporting pensions will be tax free up to $100,000 a year for each individual. Earnings above $100,000 will be taxed at the same concessional rate of 15% that applies to earnings in the accumulation phase.
- the $100,000 threshold will be indexed annually with CPI and will increase in $10,000 increments.
- the Government announcement states that this reform is expected to affect only around 16,000 Australians who have balances around or above $2,000,000 (assuming a 5% return).
- For assets purchased prior to 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2014;
- For assets purchased between 5 April 2013 and 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
- For assets purchased from 1 July 2014, the reform will apply to the entire capital gain.
The reforms will not affect the taxation of superannuation withdrawals, these continue to be tax free after attaining the age of 60.
The new reform will apply to defined benefit funds (e g government employees' pension schemes). This will be achieved by calculating the notional earnings each year for defined benefit members who receive a concessionally-taxed pension. The calculation will be based on an actuarial calculation. Where a person’s notional yearly earnings as calculated by an actuary exceed the $100,000 threshold, the amount in excess of $100,000 will be subject to tax at a rate of 15 per cent.
The media release regarding these reforms can be found here.
Other Superannuation Reforms
The government also announced a number of other superannuation reforms including:
- Simplification of the design and administration of the higher concessional contributions cap;
- Changes to the treatment of concessional contributions in excess of the annual cap;
- Extension of the normal deeming rules to superannuation account-based income streams;
- Extend concessional tax treatment to deferred lifetime annuities; and
- Further reform to the arrangements for lost superannuation.
Of particular relevance to SMSFs, some points mentioned by Minister Bill Shorten at the media conference include:
- the government announced an increase to the concessional contributions cap for those aged over 60 at 1 July 2013 to $35,000 with this increase extended to those persons aged over 50 at 1 July 2014.
- excess concessional contributions will be able to be withdrawn from the fund by the member and will be taxed at the individual’s marginal tax rate (plus an interest charge) not the top marginal tax rate.
What do people think about the proposals?
1.Political compromise - it won't balance the budget and it may not see the light of day
The total amount to be gained by the government is estimated to save around $900 million over the forward estimates period. This is not going to be the "magic bullet" to balance the May budget. Bloomberg reports the total shortfall is A$26.8 billion for the first seven months of the financial year, according to Treasury figures released March 15, 2013.
Overall, most industry participants seem to say that the reforms are reasonable but they are still "tinkering" with the system.
Some have questioned whether feared industry and media backlash led the government to back down on some of the reforms: see John Brogden on 7.30, interviewed by Leigh Sales on 3 April (video link). Similarly, in the wake of the March failed ALP leadership spill the senior resignations of Ministers such as Simon Crean, Martin Ferguson and Kim Carr called for the end to the "Class War" rhetoric and policy and the implication is that government proposals regarding superannuation formed part of that "war". Some others still see the current proposals as "the latest in a long line of failures to properly consult, co-operate with stakeholders, persuade the public and maintain a decent political position" see here. Others have noted the proposals' implementation date (from July 2014) and wonder whether they will be implemented given the election to take place between now and then.
2. Long term impact on government liability for aged pensions
In terms of the possible implications of the legislative changes, Mercer released a report on 8 April 2013 which concludes that increasing the taxation of superannuation would reduce future superannuation benefits and thereby increase future age pension payments. This adds another voice to the opposition to "continuous tinkering" which has been heard by many involved in the superannuation debate. Mercer argues this will "drive Australians to seek alternative tax-effective vehicles for voluntary super contributions".
3. Impact on long-term growth assets inside super
Anna Carrabs, Chair of the Institute of Chartered Accountants Superannuation Committee and Director, Associations of SMSF Members Australia noted on Lateline (video link) on 5 April 2013 that the proposed changes may have unintended consequences by encouraging people not to have long term investment goals (such as buying property inside superannuation) and instead going for "short sharp bursts to keep them inside the $100,000". In this interview she explains how the purchase of property with a significant long term capital gain may trigger tax consequences on realisation of that asset down the track. Carrabs also notes that the primary residence exemption from CGT and land tax means wealthy Australians can still access aged pensions if their affairs are structured well. Her point is that taxes on superannuation earnings need to be considered together with other taxes, both Commonwealth and State, in order to have a fair and equitable system which provides the best tax base.
4. Impact on eligibility or extent of aged pensions
Aged pension recipients may be negatively affected by changes to the deeming provisions in these amendments - but we will need to wait and see the detail before commenting on this.
Onward to the budget on 14 May!
5. Impact on recipients of disability/compensation payouts
The Australian Lawyers Alliance noted on 9 April 2013 that recipients of accident compensation payments and their carers would be unfairly treated by the current proposals to tax income of more than $100,000 as those people have their payments made to a defined benefit pension account in the year of the court ordered award or settlement. In the same year as the government has legislated for the NDIS scheme, this unforeseen consequence would be highly ironic, but presumably can be dealt with as an exemption to the proposed legislation. Again, we need to see more of the detail.
Comments specific to the SMSF superannuation sector can be found on the SMSF Professionals' Association of Australia website.
Onward to the budget on 14 May!
