It is becoming more common for Australia’s $1.2 billion dollar superannuation savings to take a forward role in the Federal Budget and this year is no different. There are a number of critical announcements in the 2012 Federal Budget that will affect your superannuation and ultimately how you well you retire.
Increased taxation within superannuation
The government has proposed that the rate of taxation applied for contributions and earnings within a superannuation account be raised from 15% to 30% for people with a taxable income that exceeds $300,000. The scope of what is deemed income has been widened to include taxable income, concessional super contributions, adjusted fringe benefits, net investment loss, target foreign income, tax-free government pensions and benefits, less child support. This directly impacts around 128,000 Australians who will see the contributions tax on their contributions rise by up to $3,750 per annum. This will now make superannuation taxed at the same level for some people than that of a company who is also taxed at 30%.
The method of how this will be operated is yet unclear. It is also unclear yet if this will indirectly impact the average contributor to superannuation. Benjamin Irons, a Financial Adviser from Primoris Financial states, ‘there is very little reporting between superannuation funds and their members surrounding their ongoing taxable income. If a superannuation fund needs to determine the annual income of every member every year, this will increase the administration burden on superannuation funds which will likely translate into higher account fees for ordinary investors. The superannuation proposals outlined by the government seem to impact not a small pool of high income earners, but everyone trying to save for retirement.’
With mandatory superannuation contributions increasing to 12% in the coming years, the increase in taxation applied to superannuation is expected to raise government revenues by $1b over the coming years.
In a surprise move, the Federal Government has delayed the continuation of the increased concessional contributions cap for people over the age of 50. This effectively has reduced the amount that an individual can concessionally contribute into superannuation from $50,000 to $25,000 and as of July 1st a $25,000 concessional contributions cap will apply to all individuals. The government proposed that the increased cap for individuals over the age of 50 will be deferred until July 1st 2014.
Benjamin Irons continues, ‘the period between the age of 50 and retirement is the most constructive time for pre-retiree’s to save for retirement. The kids have moved out, the mortgage is almost gone and incomes are increasing. This is the prime time to catch up on retirement savings. It is well known that a couple needs around $500,000 in capital to have even a comfortable retirement, assuming they receive the aged pension, higher if they don’t. This limit placed on pre-retirees ability to save for retirement can mean half a million dollars less in their superannuation accounts which although may increase the governments revenue in the short term, will cost the government more in the longer term, with more people forced onto the aged pension.’
Super Contribution Rebate – low income earners
The Superannuation Contribution rebate for low income earners begins on the 1st of July allowing people with a taxable income of less than $37,000 to receive a rebate of contributions tax up to $500 applied to their account, effectively reducing contributions tax to 0% for employer contributions up to $3,300 in value. This rebate can be paid in addition to the long running government co-contribution which from July 2012, allows people with taxable incomes under $37,000 to receive an extra $500 per annum from the government applied to their superannuation accounts, totalling $1,000 under both schemes.
All changes proposed in the Federal 2012 budget are due to begin on 1st July 2012 and as such existing arrangements remain in place until that date.
What’s the Benjamin’s last comment on the changes to superannuation under the 2012 Federal Budget? ‘There are significant changes to superannuation this year and although the government is not helping people’s confidence in superannuation by frequent changes, superannuation is still by far one of the most tax effective means of building wealth, saving for retirement and cannot be overlooked. Advice is paramount to ensure that you maximise what is available to you each year to best prepare for the day when you do decide to leave the workforce.’