Australia Overhauls Superannuation Tax System

By Editorial 08 April, 2013

The current tax treatment of earnings generated by superannuation assets "isn't fair and isn't sustainable," according to the Australian Government. Current estimates suggest that by 2017, 20% of the Australian population will be aged over 65. It is as a result of individuals living longer, the Government says, that overhauling superannuation tax arrangements is now necessary.

At present, all earnings on assets deemed to be supporting income streams - such as superannuation, pensions, and annuities - are exempt from tax. This is in contrast to those earnings made in the accumulation phase of superannuation, which are taxed at 15%. According to Treasurer Wayne Swan and the Superannuation Minister Bill Shorten, the planned changes "will better target the tax exemption" by introducing a cap on the amount that can be earned tax free.

From July 1, 2014, the exemption will only remain in place for future earnings on assets supporting income streams of up to AUD100,000 (USD104,351) a year. Earnings above this threshold will be taxed at 15%. The threshold will be indexed to the Consumer Price Index (CPI), and will increase in AUD10,000 increments.

Transitional arrangements, described as "generous" by Swan and Shorten, will apply for capital gains on assets purchased before the reforms enter into force. For assets purchased prior to April 5, 2013, the new rules will only apply to capital gains accrued after July 1, 2024. For those purchased between April 5, 2013 and June 30, 2014, individuals will have the choice of applying the altered rates to the entire capital gain, or only that part that accrues after July 1, 2014.

Withdrawals from superannuation funds will continue to remain tax free for those aged 60 and over, and be taxed at the existing rates for those aged under 60.

Swan and Shorten said that the current arrangements have "allowed retirees with millions of dollars in superannuation to receive more government support through tax concessions than Australia's poorest Age Pensioners." While the maximum rate of the single Age Pension currently stands at AUD21,076, tax exempt savings of AUD100,000 receive a minimum tax concession of AUD26,447 per year. According to the ministers, this "arrangement isn't fair and it isn't sustainable," and "was never the intention of the superannuation system."

Approximately 16,000 individuals are expected to be affected by this measure in 2014-15. The Treasury is projecting savings of around AUD350m over the forward estimates period. In addition, the Government will take steps to ensure that members of defined benefit funds will be equally impacted, saving a further AUD6m.

Responding to the Government's announcement, Mark Rantall, CEO of the Financial Planning Authority (FPA) said: "The FPA understands the need to make the superannuation system sustainable especially in respect to the facing baby boom retirees and longevity risk challenges for Australia. Whilst we do not support increases in superannuation taxes we understand the changes are needed to obtain sustainability and certainty for the retirement system."

Association of Superannuation Funds of Australia CEO Pauline Vamos was also broadly accepting of the plans: "We have consistently said that with an ageing population, there need to be adjustments made to ensure we meet the demands this will place on government budgets in the future. It's important that governments take action to help people boost their own retirement savings to take pressure off the age pension in the future and help retirees pay for other age-related expenses that would otherwise require further government support."

A separate reform will see the tax concession that those with income above AUD300,000 can receive on their contributions reduced from 30% to 15%. This will affect a further 128,00 people. The excess contributions tax (ECT) system will also be amended, with the aim of making it fairer and giving individuals more choice.

Under the existing arrangements, concessional contributions made in excess of the annual cap are effectively taxed at the top marginal tax rate of 46.5% thanks to the imposition of the ECT. The Government's amendments will permit the withdrawal from a superannuation fund of any excess concessional contributions made from July 1, 2013. These excess contributions will henceforward be taxed at the individual's marginal rate, plus an interest charge. As a result, approximately 41,000 people will see their tax liability reduced in 2013-14, with average savings of around AUD1,300. The interest charge will however mean that those in the top tax band will have a slightly larger tax liability. The reform will cost the Government AUD55m over the forward estimates period.

Tags: Individuals | Expatriates | Compliance | Tax | Investment | Pensions | Tax Compliance | Tax Incentives | Interest | Revenue Guidance | Retirement | Budget | Australia | Tax Thresholds | Tax Breaks | Revenue Statistics | Tax Reform |


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