The federal government has finally announced its long-awaited changes to the superannuation system, following weeks of speculation – and the industry says it’s a mixed bag.
While there are some worrisome changes, such as capping the tax exemption on earnings for superannuation streams above $100,000, others will benefit taxpayers, such as a reform of the controversial excessive contribution penalty.
Both Treasurer Wayne Swan and Superannuation Minister Bill Shorten announced the changes this morning in a press release. The majority will target wealthy Australians with more than $2 million in their super accounts, as they are set to lose some concessions.
Overall, the pair said the savings made will earn the government $900 million over the forward estimates period.
”There is something wrong in the system where working Australians on average wages are providing excessive support to people with millions in their superannuation account,” he told reporters.
Swan also said there is no guarantee these proposals could be legislated before the September election. ”We’ll do what we can with these proposals but they’ll be going to the election,” he said.
Swan argued the changes address an imbalance between the superannuation accounts of middle-class Australians and those enjoying fatter retirement accounts.
Terry Hayes, tax expert at Thomson Reuters, told SmartCompany this morning the changes are a mixed bag, with some completely unexpected.
“Some of these are very interesting moves,” he says.
The changes include:
Tax exemptions for superannuation income streams
The tax exemption for earnings on superannuation assets supporting income streams will be capped to the first $100,000 of future earnings.
Right now, new earnings on assets supporting income streams are tax-free. But from July 1 2014, earnings on assets will be tax free up to $100,000 every year for an individual. Anything above that rate will be taxed at 15%.
Treasury expects 16,000 individuals to be affected by the new tax arrangement in 2014-15, and will save $350 million.
Defined benefit funds
One new change insists members of defined benefit funds, including politicians, will be affected by the reform as well. This is set to save $6 million
Concessional contributions cap
The design and administration of the concessional contributions cap will be simplified. Currently, people aged over 60 can only contribute $25,000 a year. That is set to be raised to $35,000.
The cap will be introduced for over 60s by July 2013, while those aged over 50 can access the cap by July 2014. The general cap will reach $35,000 by 2018.
The higher cap won’t be limited to anyone, following advice from the industry that keeping the cap exclusively to people with balances under $500,000 would be too hard to administer.
Excessive contributions cap
Under the current scheme, contributions in excess of the annual cap are taxed at 46.5% instead of the normal 15% rate. This has been a sore point among the superannuation industry.
Now, the government will allow individuals to withdraw excess concessional contributions made from July 1 2013 from the superannuation fund. Also, the government will tax excess concessional contributions at the marginal tax rate, plus an interest charge.
“Treasury estimates that this reform will reduce the tax liability of around 41,000 people in 2013 14, by around $1,300 on average.”
“Around 59,000 people on the top marginal tax rate will have a slightly larger tax liability due to the interest charge.”
Deeming rules for superannuation account-based income streams
New changes will affect superannuation account-based income streams. Standard pension deeming arrangements will apply to new superannuation account-based income streams assed under the pension income test after January 2015.
“All products held by pensioners before January 1, 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules for the life of the product so no current pensioner will be affected, unless they choose to change products,” both Swan and Shorten said today.
Other arrangements will include extending concessional tax treatments to deferred lifetime annuities and reforming arrangements for lost superannuation.
The government will also create a “Council of Superannuation Custodians” to ensure future changes are consistent with the Charter of Superannuation Adequacy.
CPA policy head Paul Drum says while it’s good the government has “come clean” on its plans, there is still a need for a review on national savings.
“We could go through item by item, but we need to wait and see the full detail of all of this,” he says.
“It hasn’t gone through cabinet, or Parliament. This hasn’t even gone over the line yet. If there’s a change of government, it might not even get up.”