On the 14th of May the Federal Government handed down its keenly anticipated Budget, which had few surprises in store for self managed super funds (SMSFs), reaffirming the superannuation changes they announced on 5 April 2013.
Firstly, in light of the upcoming Federal Election there are some doubts about whether some of the proposed superannuation changes will be passed through in the remaining Parliamentary sitting weeks before the election.
To recap, these proposed changes:
- Introduce a 15% tax on earnings in excess of $100,000 on superannuation retirement accounts
- Reconfirm the commitment to apply a 15% tax on concessional contributions for individuals who earn over $300,000
- Simplify the design and administration of the higher concessional contributions cap
- Change the treatment of concessional contributions in excess of the annual cap
- Extend the normal deeming rules to superannuation account-based income streams
- Extend concessional tax treatment to deferred lifetime annuities
- Further change the arrangements for lost super.
Impact of the upcoming federal election
In announcements prior to budget night, the Government committed to introducing legislation, prior to the federal election, to give effect to the concessional contribution cap changes and the treatment of excess concessional contributions. However, as mentioned above, legislation will still need to be passed giving effect to these changes.
Impact on SMSFs
Given SMSF members have, on average, higher incomes and higher superannuation balances than members in larger super funds, most of these changes could have the biggest impact in the SMSF sector.
Here’s a brief round-up below of what the Federal Budget 2013/14 could mean for you:
Increased concessional contributions cap
As previously announced, the Government will increase the concessional contributions cap to $35,000 (unindexed) as follows:
- For the 2013/14 financial year, the higher cap of $35,000 will apply to individuals who are aged 59 years or over on 30 June 2013. For all others the general cap of $25,000 applies
- For each financial year from 2014/15 onwards, the higher $35,000 cap will apply to individuals who are aged 49 years or over on 30 June of the previous financial year.
The higher concessional contribution cap will apply until the general concessional contribution cap reaches $35,000 due to indexation (expected to occur from 1 July 2018). That is, the higher cap will only be temporary.
The current $150,000 limit together with the additional 2 year “bring forward” rules for non-concessional contributions remain completely unchanged for all individuals.
Changes to excess concessional contributions tax arrangements
Excess concessional contributions will be taxed at an individual’s marginal tax rate, plus an interest charge to recognise that the tax on excess contributions is collected later than normal income tax.
In addition, these individuals will have the option of deciding whether they want to withdraw their excess concessional contributions from their superannuation fund.
These reforms will apply to all excess concessional contributions made from 1 July 2013.
Under the current arrangements, concessional contributions in excess of the annual cap are taxed at the top marginal tax rate regardless of the personal marginal tax rate faced by the individual. In addition, individuals are only able to withdraw excess concessional contributions the first time they make an excess contribution after 1 July 2011, and only up to a maximum amount of $10,000.
Limit on tax exemption for earnings in pension phase
From 1 July 2014 the amount of exempt current pension income available to superannuation funds will be limited to $100,000 a year for each individual.
Fund earnings, derived from pension assets, above this limit will be taxed at the 15 per cent rate that applies to earnings in the accumulation phase.
This proposed $100,000 limit will be indexed to the Consumer Price Index (CPI), and will increase in $10,000 increments.
Currently, when a superannuation fund makes a capital gain on assets in the pension phase, the capital gain amount is also treated as exempt current pension income (and therefore exempted from tax). However, a capital gains tax event is only triggered in the year that the fund disposes of the asset.
As such, special arrangements will apply when assessing capital gains on assets purchased by a fund before 1 July 2014:
- For assets that were purchased before 5 April 2013, a full tax exemption will continue to apply to capital gains that accrue before 1 July 2024
- For assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of including in the $100,000 limit the capital gain, or only that part that accrues after 1 July 2014
- For assets that are purchased from 1 July 2014, the capital gain will be included in the $100,000 limit.
When assessing capital gains that are subject to this tax, a 33 per cent discount will apply (where applicable), to effectively tax the gain at a rate of 10 per cent.
It is important to note that this reform will not affect the tax treatment of withdrawals (both lump sums and pensions) made from a superannuation fund. Withdrawals will continue to remain tax-free for those aged 60 and over, and be subject to the existing tax rates for those aged under 60.
The Government will also ensure that members of defined benefit funds, including federal politicians, are impacted by this new reform in the same way as members of defined contribution funds (i.e. that there will be a corresponding decrease in concessions in the retirement phase).
Additional 15% tax on concessional contributions for high income earners
In the May 2012 Federal Budget the Government announced a proposal to apply an additional 15 per cent tax to concessional contributions made from 1 July 2012 for individuals who have combined annual income and concessional contributions greater than $300,000. Since then, draft legislation has also been released.
The key details of this measure are summarised below:
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