Here we go again

The latest changes cast a wide net

STORY PETER FREEMAN

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THE SUPERANNUATION proposals announced by the federal government last month will affect many more people than simply the small number directly impacted by the tightly targeted new tax on superannuation income streams.

While it is possible none of the proposals will be implemented, the superannuation industry is generally supportive.

“We welcome the government’s announcement regarding reforms to the superannuation system,” says Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia. The main proposals are:

• The first $100,000 of annual earnings on the investments backing a super account in the pension phase (most of these income streams are known as account-based pensions) will continue to be tax free, but every dollar above this amount will be taxed at 15%.

• Account-based pensions will be subject to a tougher income test for determining a person’s eligibility for the age pension.

• Superannuation contribution limits (or caps) will be lifted from $25,000 to $35,000 a year.

• For the vast majority, any contributions that exceed these limits will be treated less harshly than at present.

• So-called deferred lifetime annuities will get similar concessional tax treatment to account-based pensions (see next page).

• The financial threshold for declaring a super account “lost” will rise from an account balance of $2000 to $2500 from December 31, 2015, and to $3000 a year later.

• Establishment of an independent council of superannuation custodians to assess all future superannuation changes.

As usual, of course, it is important to pay close attention to the detail, Vamos cautioning that there is a lot of complexity. “We will examine the proposed changes in detail to ensure they deliver the best outcome,” she promises. Colin Lewis, head of technical services at ipac, also stresses the need to look closely at the detail. “No legislation has yet been introduced for any of the changes so many details are yet to emerge,” he cautions.

But some details are known. The following outlines the main ones and identifies some of the issues where the situation is not yet clear.

Tax on super income streams

An important detail of the proposed 15% tax rate on every dollar of annual earnings over $100,000 generated by a pension account is the fact this amount will rise in line with the consumer price index, although only in increments of $10,000 at a time.

The new tax will also apply to so-called defined benefit funds, although Colonial First State’s technical team says it is unclear how this would work in practice.

Another crucial detail centres on the treatment of capital gains. It is known that, in the case of assets acquired before April 5 this year, the proposed tax will apply only to capital gains that accrue after July 1, 2024. All gains built up before then will not be taxed irrespective of when the gains are realised.

In the case of assets acquired from April 5, 2013, to June 30, 2014, the individual can choose either to apply the changes to the entire capital gain (which may be useful if you have a capital loss) or only to that part that accrues after July 1, 2014.

The changes will apply to all the capital gain made on assets acquired from July 1, 2014.

Lewis says the new tax arrangements may make buying property in a self-managed super fund, including using gearing, less attractive due to the fact that selling the property can result in a large, one-off gain well in excess of $100,000.

At this stage it is not known whether an income stream inherited by a spouse who also has an income stream will be kept separate for the purpose of the $100,000 threshold.

Tougher pension income test for super income streams

At present the amount used to start an account-based pension is treated as an undeducted amount. Essentially this means it is divided by your life expectancy and the resultant amount then excluded when applying the income test.

For example, if you started your super pension with $600,000 and had a life expectancy of 20 years, a fixed amount of $30,000 would be deducted from your annual account-based pension payment when applying the income test.

This will continue to be the case for super pensions started by June 30, 2015, which will be grandfathered indefinitely unless you change products.

Income streams bought after this date will be assessed using the standard, less generous deemed income rules.

These will be applied to the pension account balance to work out age pension eligibility.

What isn’t certain is whether this new regime will apply only to the age pension or to all government benefits. Lewis believes it will be the latter.

Super contribution caps

From July 1 this year, the annual cap for concessional contributions will rise from $25,000 to $35,000 for those aged 60 or more and do the same from July 1, 2014, for those aged 50 and over. The government’s announcement, which was applauded by ASFA, made no reference to the cap on non-concessional contributions. According to Lewis, it is likely to remain at six times the base concessional cap (currently $25,000), resulting in an annual cap of $150,000, or $450,000 over three years.

Excess contributions

At present excess concessional contributions, with the exception of a first breach of less than $10,000, are hit with penalty tax at the top marginal tax rate of 46.5%.

Under the latest proposal, which once again has been supported strongly by ASFA, from July 1 this year all excess contributions will have to be withdrawn and then will be taxed at the individual’s marginal tax rate, plus an interest charge to cover the time between when the tax would have been paid and when it is actually paid.

Treasury estimates this will affect just more than 40,000 people, and only those on the top marginal tax rate will be disadvantaged because of the imposition of the interest charge.

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