The federal government recently announced a range of superannuation changes that may impact people both while working and saving for retirement and also during retirement.
Increased in the Deductible Contributions Cap
As it currently stands, a person can contribution up to $25,000 per annum where a tax deduction has been claimed. This includes mandatory employer contributions, salary sacrifice and personal deductible contributions (e.g. self-employed contributions).
In 2011 the government proposed that the concessional contributions cap would increase to $55,000 in 2014/15, however this no longer seems to be the case. The government has now proposed that the contributions cap will be increased to $35,000 from;
- 1 July 2013 for people aged 60 and over, and
- 1 July 2014 for people aged 50 and over.
Although unfortunate that it does not seem that the $55,000 limit will be introduced, the increase is welcomed and will allow pre-retirees greater limits to contribute into superannuation before retirement. This increases the potential taxation benefits and increases the effectiveness of pre-retirement pension strategies.
Tax on Pension Earnings over $100,000
Arguably one of the more controversial measures, the government has proposed to tax earnings within pension accounts where earnings exceed $100,000 from 1st July 2014. Earnings above this threshold will be taxed at 15%.
Currently all asset based earnings inside of pensions are tax-free. Although currently tax-free, the tax where applied is still substantially lower than that of similar income based earnings.
It has been reported that the taxation will affect only those with assets above $2m, however being a tax on earnings; the taxation will be based on the return that the pension achieves. The higher the investment returns, the lower the balance needs to be before taxation is applied. For example;
- A 5% return on assets would mean an effective threshold of $2m
- A 10% return on assets would $1m
- A 15% return on assets would $667k
The taxation is only applied to earnings within the account and not the actual amount withdrawn from the pension.
The biggest impact from this measure will be from capital gains on asset sales during retirement, with the most common likely to be property sales within an SMSF. Where the capital gain increases the income of the SMSF to over $100,000, the taxation will apply.
Refund of Excess Contributions
It has also been proposed that contributions from the 1st July 2013 that exceed the concessional cap (contributions where a tax deduction is claimed), can be withdrawn.
The amount withdrawn will be taxed at the marginal income tax rate of the individual, however where inadvertent breaches have been made, this can save a person additional excess contributions tax.
Social security changes to account-based pensions
Not all account-based pensions are treated the same for social security purposes, with some receiving concessions against the income test. The government has proposed to align all account based pensions to be treated the same and will be ‘deemed’ to be earning a particular rate of return. It is anticipated this will take effect from the 1st July 2015, with a pensions established prior to that date being exempt.
The government has indicated that they will not introduce legislation before the federal election in September and it is unknown if the changes will be supported by the parliament at that date.
The proposed changes to superannuation highlight the need to regularly review retirement savings strategies and superannuation funds to keep abreast of changes and to plan for any consequences. Before acting on any general information in this article, you need to seek advice from a licensed superannuation adviser!
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!