As part of the 2012 Federal Budget, the Federal Government announced there would be increased contributions tax from 15% to 30% for individuals earning over $300,000 per annum.
The start date of the increased superannuation contributions tax is the 1st July 2012. The legislation was not passed prior to this date and the increased tax is expected to be assessed from individuals superannuation accounts from January 2014 and collected retrospectively.
The impact of this measure for individuals earning over $300,000 is an increased contributions tax for high income earners collected by the superannuation fund when a concessional contribution is made. The increased contributions tax is applied to any contribution where contributions tax would apply and includes mandatory employer contributions, salary sacrifice and self-employed contributions.
For those who are still invested in ‘Defined Benefit Schemes’ the increased contributions tax applied is based on the ‘notional employer contributions.’
The definition of income that defines if an individual is liable for the increased contributions tax is wider than simple earnings and aligns closely to the definition of ‘adjusted taxable income.’ For the purposes of the increased superannuation contributions, the definition of ‘income’ includes;
- Taxable income and any adjusted fringe benefits
- Concessional superannuation Contributions (i.e. salary sacrifice)
- Target Foreign Income and net investment losses
- Tax free ‘government’ benefits
The total income applied for this benefit is reduced by any child support payable.
Where any concessional contributions are being made to superannuation (for example salary sacrificed contributions) and the value of the extra contributions causes the individual to exceed the $300,000 threshold, the government has stated that the increased contributions tax would apply only to the amount over $300,000. An example is if a person earning $290,000 has concessional contributions of $25,000 then the higher tax will be applied to $15,000 of the overall contribution amount.
A major issue of this scheme is the impact is has on individuals who do not normally earn income in excess of $300,000. Capital Gains are included in the definition of taxable income meaning persons that sell assets that subsequently result in the tax payers total income going over the high income threshold, may be subjected to the higher rate of tax on their superannuation contributions in the year that they sell the underlying asset. As such this measure may actually disadvantage some tax payers, especially those closer to retirement that start selling assets in preparation to leave the workforce.
The result of the increased in the tax rates applied will see up to an extra $3,750 being deducted from concessional contributions, which for a $25,000 contribution, will see the maximum contributions tax applied being $7,500.
Of note, the increased tax on superannuation contributions is not applied to fund earnings and ongoing fund earnings will be continue to be taxed at 15%.
It is not yet known how the tax will be collected by superannuation funds and it is not known how superannuation funds will track the ongoing income of its members to determine who to take the additional tax from. Currently superannuation funds do not normally track the income of their members, let alone the wider definition of income required under this measure. A major criticism of this scheme is that superannuation funds will be required to change their reporting and record keeping systems to track on an annual basis the incomes of their members (including no doubt when their members receive irregular taxable income) to determine who to deduct the increased taxation from. Increased measures on superannuation funds unfortunately mean increased costs which it is anticipated would be applied to all members, increasing the administration costs for all members.
The result of the changes in contributions tax for high income earners require contribution, tax and retirement planning strategies to be reviewed to ensure that the full benefits of contributions are derived.
Have questions about how the tax will be collected or wonder if you will be inadvertently caught under the caps? Start the discussion below!
About the Author – Benjamin Irons
Benjamin has been involved in the financial services industry since 2004. Benjamin has a Bachelor in Business, Diploma of Financial Services (Financial Planning). Previously a Financial Adviser and a business owner, Benjamin has worked with hundreds of individuals and businesses to implement simple strategies to improve wealth. Benjamin writes for a number of websites to assist people take control of their finances and find their financial freedom!