Superannuation changes

After months of speculation, the Federal Government finally revealed the changes it is making to superannuation.

To understand the changes, first you need to know that the government defines super in two phases. The first is the ‘accumulation’phase (when you are still working and earning superannuation payments) and the second is the ‘pension’ phase (when you are retired and withdrawing your super).

The biggest change is that people with superannuation accounts which generate earnings above $100,000 per year (usually meaning they have more than $2 million in them) will now be liable for a 15% tax on yearly earnings.

Currently, there is no taxation on super when it is being paid out (in the pension phase) regardless of the size. Treasury believes that 16,000 accounts will be affected when the changes go live on 1 July 2014.

In a statement, Treasurer Wayne Swan’s office outlined that in just four years, 20% of Australia’s population will be over 65.

Treasury is also making allowance for capital gains on assets purchased before the changes. Assets purchased before 5 April 2013 will not have the reform applied on capital gains before 1 july 2024.

Defined benefit funds (such as the one politicians get) will also be subject to the 15% tax rate where yearly earnings exceed $100,000.

The Association of Superannuation funds of Australia (ASFA) came out in support of many of the changes, releasing a statement outlining the changes and what the industry’s view was.

““The goal of the superannuation system is to support people so they have enough income to live a comfortable retirement and people who have large balances with earnings of over $100,000 per annum will be able to do this even with the additional taxation applied,” read a statement from ASFA.

“At 15% they are still receiving a significant tax advantage when compared with income taxed at marginal rates,” added ASFA. “Therefore we are not against a measure of this type, although ASFA believes a more reasonable figure would be applying such a tax on earning on balances over $2.5 million ($125,000 annual return at five per cent) as we stated in our pre-budget Submission in February this year.

“We do have some concerns with how this will be implemented as it appears to be complex to administer and we will consult with government regarding this over the coming months.”

Another change being brought in is an increase in the contribution cap for those aged over 50. Currently there is a $25,000 cap in place, with contributions over that amount being penalised (defined as an excess contribution). Under the new system, people aged over 60 will be able to contribute $35,000 per annum, regardless of account balance, starting from 1 July 2013.

Those aged over 50 will be able to contribute up to $35,000 per annum, regardless of account balance, starting a year later on 1 July 2014.

Excess contributions (over the cap) are currently taxed at a rate of 46.5% regardless of their income. Under the new system, the government will allow individuals to withdraw any excess contributions (often made unintentionally).

The excess contributions will also be taxed at that individuals marginal tax rate, rather than the 46.5% that it is now (for most people it will be significantly lower).

“We have been advocating this issue for a long time and wholeheartedly welcome this initiative as a simpler and fairer way to tax excess contributions,” added the ASFA.

The government is also planning to establish a Council of Superannuation Custodians made up of representatives from the community, industry and regulators to provide independent advice on superannuation policy.