Following recent media speculation
about possible changes to superannuation in the upcoming 2013–14 Budget and concerns about the inequity of tax concessions for superannuation
, on 5 April 2013 the Government announced
a range of measures to superannuation tax, contribution and age pension arrangements. The Government’s overall intent in making these changes was to ‘improve the fairness, sustainability and efficiency of the superannuation system’. So what are the major changes proposed by the Government and how do they contribute to fairness?
In general, arguments about ‘fairness’ in the superannuation system primarily stem from concerns that superannuation tax arrangements allow higher income earners, who can generally contribute more to superannuation, to gain the greatest benefit from the available tax concessions. In early 2012, the Treasury estimated that the highest 10 per cent of taxable income in 2012–13 received more than 20 per cent
of the share of contribution concessions.
While a number of countries
(p. 43) use the ‘fairness’ established in a progressive income tax system to tax retirement savings when it is paid as income upon retirement , the tax model adopted for superannuation in Australia largely since 1988
(p. 141) has been to concessionally tax superannuation contributions and fund earnings at a rate of 15 per cent. This was justified on the basis that payments were taxed at marginal rates, but, since July 2007, payments have generally been tax-free upon retirement.
Under this system, the fairness as determined by the progressive tax system combined with a flat 15 per cent concession gives larger tax concessions to higher income earners. The major tool to influence the distribution of tax concessions was the ‘reasonable benefit limit’; in July 2007 this was changed to administratively complex controls on annual contribution limits.
In summary, the announced measures are estimated to have an overall net financial impact of $947 million over the forward estimates.
The key measures are outlined below.
|Measure ||Commencement ||Financial impact over the forward estimates |
|Cap the tax exemption for earnings on superannuation assets supporting income streams at $100 000, with a concessional tax rate of 15 per cent applying to the earnings of the fund thereafter, and apply a similar treatment to those in defined benefit schemes ||1 July 2014 ||+$356 million |
|Change the design and administration of the higher concessional contributions cap ||1 July 2013 for those aged 60 or over |
1 July 2014 for those aged 50 or over
|+$365 million |
|Change the treatment of concessional contributions in excess of the annual cap ||1 July 2013 ||-$55 million |
|Extend the normal deeming rules to superannuation account-based income streams ||1 July 2015 ||+$158 million |
|Extend concessional tax treatment to deferred lifetime annuities ||1 July 2014 ||Nil |
|Further increase threshold of $2000 for transfer of superannuation account balances to the Australian Taxation Office for inactive accounts and accounts of uncontactable members ||$2500 from 31 December 2015 |
$3000 from 31 December 2016
|+$123 million |
|Total || ||+$947 million |
In general, the superannuation industry has been supportive of the announced measures. Criticism of the package has largely related to potential complexity in implementation
of the 15 per cent tax on fund earnings of more than $100 000 in the pension phase.
In addition to the administrative complexity associated with this measure, the interaction with other aspects of the taxation system, such as capital gains tax and dividend imputation arrangements, may mean that the tax raised by imposing a tax-free $100 000 threshold on fund earnings in the pension phase will vary from individual to individual depending on the investment structure of each fund.
All of the announced superannuation measures continue a series of complex changes announced by the Government over recent years:
- the proposed 15 per cent tax on earnings above $100 000 reduces the value of tax concessions available to higher income earners and supports the 2012–13 Budget announcement (p. 41)—not yet legislated—to reduce the tax concession for those earning more than $300 000 from 1 July 2012
- the proposed $35 000 cap for concessional contributions for those aged 50 or more replaces a previous announcement in the 2010–11 Budget (p. 41) of a higher cap of $50 000 for those aged 50 or more with accumulated superannuation balances of $500 000 or less from July 2012 and then an announced delay to this measure for two years to July 2014 in the 2012–13 Budget (pp. 40–41)
- the proposed changes to the threshold for the transfer of superannuation account balances to the Australian Taxation Office for inactive accounts and accounts of uncontactable members follows changes announced in October 2012 (p. 171) and implemented by November 2012 to lift the previous thresholds from $200 to $2000
- the proposed change to the design and administration of the higher concessional contributions cap follows the announcement in the 2011–12 Budget (p. 43) and implementation by June 2012 of a limited refund of excess concessional contributions for one-off breaches of the cap by up to $10 000.
With the first measure due to commence in 1 July 2013, the Treasurer has indicated
that the Government may not bring legislation to support the measures into the Parliament prior to the announced election on 14 September 2013.