THE SUPER NEW LANDSCAPE


ADDITIONAL TAX ON CONCESSIONAL SUPER CONTRIBUTIONS OF HIGH INCOME EARNERSBoth the Opposition and the Government if elected will reduce the income threshold above which the additional 15% “Division 293 tax” cuts in for concessional superannuation contributions. The threshold will be reduced from $300,000 to $250,000 from 1 July 2017.  For those who earn below this amount, the tax on concessional contributions will remain at 15%.  To recap, concessional contributions consist of employer Superannuation Guarantee contributions, salary sacrifice contributions, and after-tax contributions for which you can claim a deduction under the “10% Rule”.  The $300,000 / $250,000 income threshold consists of:
  • Taxable income
  • Total reportable fringe benefit amounts
  • Net financial investment losses
  • Net rental property losses
  • Net amount on which family trust distributions tax has been paid
  • Concessional superannuation contributions made within the concessional contributions cap for the financial year.
Note that if an individual’s income excluding their concessional contributions is less than the threshold but the inclusion of their concessional contributions pushes them over the threshold, the extra 15% tax will only apply to the part of the contributions that are in excess of the threshold.EXAMPLEGrace has Division 293 income of $240,000, and has made concessional contributions of $20,000.2015/2016 AND 2016/2017As her Division 293 income plus concessional contributions is below $300,000, Grace’s concessional contributions will be taxed at 15% (payable by her superannuation account in the year that the contributions are made).2017/2018 ONWARDSAs her Division 293 income plus concessional contributions is above the new threshold of $250,000, Grace is liable for an additional 15% tax (30% in total).  The 30% tax will be applied to the $10,000 concessional contributions above the $250,000 threshold.  The total superannuation contributions tax will be $4,500.$1,500 (15% x the $10,000 below the $250,000 threshold) plus$3,000 (30% x $10,000 above the $250,000 threshold)Although this policy has attracted significant attention in the media, the actual impact will not be widespread as only 4% of taxpayers earn above $250,000, and the lowering of the threshold will only affect an estimated 110,000, people (those who earn between $250,000 and $300,000).  Even if this tax increase makes it into law, those who salary sacrifice will still enjoy a tax benefit of up to 19 cents in the dollar on amounts that they sacrifice into superannuation.CAPPING THE AMOUNT OF TAX-FREE INCOMEAlthough they have gone about it differently, both the Government and the Opposition have announced policies to limit the amount of tax-free superannuation income that can be enjoyed in retirement.GOVERNMENTFrom 1 July 2017, the Government proposes to introduce a transfer balance cap of $1.6 million on the total amount of accumulated superannuation that an individual can transfer into a tax-free retirement account (retirement phase or pension phase).  Earnings made when your account is in the retirement phase or pension phase are tax-free.  Earnings on these balances will not be restricted.  By limiting the amount of capital to $1.6 million, this will in effect limit the amount of earnings/income that can be received tax-free when your account is in the retirement/pension phase.  This applies to existing pensions as well as future pensions.To be clear, you will still be able to have amounts in excess of $1.6 million inside superannuation, however these excess amounts must be in an accumulation phase account (where earnings are taxed at the existing concessional rate of 15%).  The $1.6 million cap will be indexed in $100,000 increments in line with the Consumer Price Index (CPI).For those of you who have accounts in the retirement phase as at 1 July 2017, if you have amounts in excess of $1.6 million you will be required to either transfer the excess back into an accumulation account, or withdraw the amount from your superannuation fund (only if you are over 60 will the withdraw be tax free – if under 60, there will be tax on the taxable component). Regarding the total cap amount of $1.6 million, once amounts are transferred into the retirement account, subsequent fluctuations due to earnings growth or pension payments will not affect the amount of the cap used.EXAMPLEBrad is 64 and retires from work and therefore meets a Condition of Release in December 2017.  He has $2.3 million in superannuation.He can transfer $1.6 million into a retirement account, the earnings on which will be tax-free.  The remaining $700,000 can sit in an accumulation account (the earnings on which will be taxed at the standard 15%).  All pension amounts received will be tax-free in Brad’s hands as he has turned 60.Alternatively, Brad can withdraw the $700,000 tax-free as he has turned 60.
STRATEGYThis proposal may allow couples to have a combined pension balance of up to $3.2 million.  However, where most of the superannuation savings are in one spouse’s name, the Government’s lifetime non-concessional superannuation cap (see later) may limit the ability to equalise account balances and maximise the combined transfer balance cap.
OPPOSITIONAlong similar lines, the Opposition if elected will tax the superannuation pensions of high-income earners.  Under their policy, from 1 July 2017 future earnings on assets supporting income streams will be tax free up to $75,000 per year for each individual.  Earnings above the $75,000 threshold will attract the same tax rate of 15% that applies to earnings in the accumulation phase.EXAMPLESusie is 63 years old, retired and she has $1.8 million in superannuation.  Susie is drawing an account-based pension, thus her account is in pension mode where her earnings are tax-free. Last year, Susie’s superannuation earned $90,000 (at a rate of 5%) which she has taken as income.  Under Labor’s proposal, Susie will pay 15% tax on earnings over $75,000.  This equates to $2,250 tax (payable out of her superannuation savings, not charged to her personally) which reduces her after-tax earnings to $87,750.
IMPACTBoth the Government’s and Opposition’s policy again will not have a widespread impact as only 60,000 people are estimated to be impacted under either policy (those who have account balances in excess of $1.6 million).  Even for those who are impacted, the maximum rate on earnings (15%) is more attractive than the individual marginal tax rates that may apply to earnings on investments made outside of superannuation.