Proposed Changes to Superannuation

Posted in Wealth
10/04/2013 Level One

Following weeks of speculation the Government has released an announcement in relation to Superannuation. We note that these changes will apply to all superannuation funds, not just Self Managed Superannuation Funds (SMSF). Please find below a summary of the announced reforms:

The Good………

  • From 1 July 2013 the Concessional Contribution Cap will be increased to $35,000 (up from $25,000) for people over age 60. This change will also apply to persons aged 50 and over from 1 July 2014. This is regardless to the size of your superannuation balance (previously reported to be under $500,000).
  • From 1 July 2013 excess concessional contributions can be returned to the member from their superannuation fund and taxed at the individual’s marginal rates, instead of taxed at the current excess concessional contribution tax rate (15% contributions + 31.5% excess contribution tax).
  • Tax free withdrawals from Superannuation from age 60 remain unchanged.

The Bad………

  • Still no changes to the treatment of excess non-concessional contributions, which are currently taxed at 46.5%.
  • Changes to how Centrelink assess superannuation pension income will apply from 1 January 2015, this will apply to new pensions only. Normal Centrelink deeming rates will apply and will probably result in reduced age pension entitlements as the “exempt income amount” is abolished.
  • The tax free status of pension income (capital gains and investment income) will be capped at $100,000 per annum per person from 1 July 2014. Income and capital gains above this amount will be taxed at 15% within the fund.
  • Capital Gains tax will apply to assets in pension phase if purchased after 1 July 2014. A breakup of how this will apply is as follows:
    • For assets purchased before 5th April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
    • For assets purchased from 5th April 2013 to 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;
    • For assets purchased from 1 July 2014, the reform will apply for the entire capital gain.
  • At this stage its unclear if the entire capital gain will be assessed and counted under the $100,000 pension exemption limit or if capital gains tax discounting applies.

The Ugly………

The Government has stated that the $100,000 threshold limit will only affect the wealthy. Unfortunately this is not the case.

  • If you make a one off capital gain on say the sale of a property in excess of $100,000 you will be liable for this tax. This is a very likely issue especially if the property is held long term.
  • This could also occur where you are reaching retirement and want to move out of growth assets and into say term deposits or wish to restructure your portfolio as the market has performed strongly. If you generate capital gains in excess of $100,000 you will be liable for the additional tax.
  • And finally as we are all aware investment returns can be quite volatile. After a period of negative returns, positive returns of 20% are not out of the question. So if you have a superannuation balance of $500,000 a 20% return brings you up to the $100,000 mark. You will only reach the $100,000 mark if you sell your assets, paper returns are not assessed but income and capital gains are.

REMEMBER: these are proposed changes. These announcements will still need to proceed through the normal political process before they become law. More to follow as clarification becomes available.


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