With the government having ruled out almost every other option to fund tax cuts, including raising the rate and base of the GST or placing limits on negative gearing, Treasurer Scott Morrison has made it clear that the government will be winding back super concessions on or before the May 3 budget.
In this article we have identified some of the speculated changes in the super and personal taxation environments.
Current Superannuation Legislation
The concessional contribution limit (which includes super guarantee, salary sacrifice and deductible self-employed contributions) is currently $35,000 per annum for people aged 50 and over at any time during the current financial year, and $30,000 for people under 50. Concessional contributions are taxed at a rate of 15% upon entry into a super fund if a person’s ‘income’ is less than $300,000 during the financial year and at 30% if it exceeds this amount.
The current limit on non-concessional contributions is $180,000 per annum. Non-concessional contributions are personal contributions made from after tax money which is not being claimed as a tax deduction. No tax is deducted from these contributions upon entry into the super fund.
Individuals aged under age 65 can currently ‘bring forward’ two years of non-concessional contributions, providing their non-concessional contributions do not exceed the applicable three-year cap. For example, if a contribution of $540,000 is made in one year, they cannot make any non-concessional contributions for the following two financial years.
Investment earnings (income and capital gains) within a super fund while in accumulation phase are taxed at a maximum rate of 15%. However, capital gains on assets held for longer than 12 months within the fund are taxed at 10%.
Once a person starts to draw an income stream from their super account, they move into pension phase. There are currently two main types of pension arrangements: Transition to Retirement and Account Based Pensions accounts.
At present, the Australian Government allows individuals to keep working while drawing down some of their super benefits (subject to meeting preservation age, currently 56), via a Transition to Retirement arrangement. Certain rules apply to Transition to Retirement pensions such as restriction on the maximum amount a person can withdraw (maximum 10%) and no ability to withdraw lump sums. This arrangement allows people to supplement their salary, save tax and boost their super in the lead up to retirement.
An Account Based pension is a regular income stream, purchased with money accumulated in super, after preservation age has been reached. Unlike the Transition to Retirement pension, to start an Account Based pension an individual must also meet a condition of release, e.g. permanent retirement from the workforce. The maximum and lump sum restrictions do not apply to Account Based pensions, although a minimum amount must be withdrawn each year, which is based on the balance of the account on 1 July each year and the person’s at that time.
Currently no tax is paid on investment earnings (income and capital gains) within a pension account. In addition, no tax is paid on pension payments from age 60 (the taxable portion of a pension will be taxed at an individual’s marginal tax rate less a 15% tax offset for those aged between 56 and 59).
Possible Changes to Superannuation Legislation
There has been a number of policy options suggested by government and various industry bodies in relation to the current super legislation, some of which we have outlined below:
- Taxing superannuation contributions like income on a sliding scale, minus 15% tax. Meaning the more a person earns the more they will pay in contributions tax as outlined in the table below.
|Taxable Income||Marginal Tax Rate (MTR)||Current Contribution Tax||Proposed Contribution Tax (MTR-15)|
|$18,201 – $37,000||19%||0%||4%|
|$37,001 – $80,000||32.5%||15%||17.5%|
|$80,001 – $180,000||37%||15%||22%|
|$180,001 – $300,000||45%||15%||30%|
|$300,001 & over||45%||30%||30%|
- A 15% tax rebate for all concessional super contributions, irrespective of income. For example, if a person puts $10,000 into super they will get a $1500 tax offset regardless of what their marginal tax rate.
- Reducing the current $30,000/$35,000 annual concessional cap to $20,000 for everyone.
- Increasing contributions tax from 15% to 30% per cent for people earning over $250,000. Currently the 30% contributions tax only applies to people earning over $300,000.
- Reducing the annual non-concessional contributions cap from $180,000 at current rates to $90,000 and abolishing the three-year bring forward rule.
- Taxing investment earnings above $75,000 in pension phase at the same concessional rate of 15% that applies to earnings in the accumulation phase, with the first $75,000 of investment earnings remaining tax free.
- Limiting or abolishing Transition to Retirement pensions..
Possible Capital Gains Tax Changes
There is speculation that the Capital Gains Tax discount, currently 50% where an asset has been held for over 12 months, may be reduced. Several suggestions have been made in relation to the reduction amount, some suggesting 40%, others 33.3% in line with Capital Gains Tax rate inside super, or even as low as 25%.
An alternative suggestion, or one that may be coupled with the reduction, is to increase the length of period the asset has to be held to qualify for the capital gains tax discount, e.g. from 12 months to 24 months.
Action to Take Before Budget Night
While there has been widespread speculation about potential changes to super and capital gains tax legislation, we cannot be sure what changes will take place until these are announced.
Furthermore, if changes are made to the legislation it is likely that grandfathering provisions will apply. Historically, this has meant that any changes to legislation do not impact strategies that have already been implemented, e.g. starting a Transition to Retirement pension now.
We suggest that you consider the strategies outlined below and encourage you to contact us to discuss in greater detail in relation to your personal objectives, needs and financial situation, to establish if there are any strategies that you should implement prior to budget on 3 May 2016.
- Maximising concessional and non-concessional superannuation contributions (subject to eligibility in relation to cap limits, work test, 10% rule).
- Starting a Transition to Retirement pension if you are still working and are aged 56 or over.
- Evening up pension account balances between spouses to potentially manage the effects of tax on investment earnings of more than $75,000.
- Consider realising Capital Gains that are subject to the 50% discount (whilst also having regard for your marginal tax rate).
Please note the above information is SPECULATION ONLY in relation to some of the possible changes that have been discussed in the media and some or all of these may not eventuate.
This information should be regarded as general advice only, that is, your personal objectives, needs or financial situation has not been taken into account when preparing this information.
Accordingly, you should consider the appropriateness of any general advice we have provided, having regard to your own objectives, financial situation and needs and discuss with Alder & Partners Private Wealth Management before acting on it.