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2013 Federal Budget Update

Last night the Federal Government handed down what was a Budget with few surprises around SMSFs, reaffirming the superannuation changes they announced on 5 April 2013.

The key measures are:

  • A staged introduction of a higher concessional contribution cap for older Australians, starting initially with those over the age of 60, then transitioning to those over 50
  • Reforming the concessional contribution excess treatment so that excess amount is removed from the superannuation system and the tax applicable is the amount due if the contribution was normal assessable income for the member. An interest charge will be applied to recognise the delay in the payment of the tax and the fact the excess amount still earned income in the lower tax environment
  • Removing the social security treatment arbitrage that exists between superannuation member balances that are in accumulation phase and pension phase. This will mean that deeming that applies to all other financial assets including superannuation accumulation balances will apply for the Incomes Test
  • Providing concessional tax treatment for deferred lifetime annuities. This will assist with product development to address the longevity risk that arises from a defined contributions system
  • Imposing a limit on the tax exempt treatment of taxable income for pension assets in a superannuation fund. This measure will cap the exempt income that an individual receives in respect of their pension balance to $100,000 per annum, with any excess being taxed at the superannuation concessional tax rate of 15%. Special transitional rules will apply in respect of capital gains that arise for assets acquired prior to 1 July 2014.

Please read on for further information.


A staged introduction of a higher concessional contribution cap for older Australians
When Simpler Super was introduced in 2007, the Government imposed a sunset clause on higher contribution levels for other age 50 persons that ceased at 30 June 2012. This meant that from that date the same level of contributions concessions would be available to all people irrespective of age.

In 2010 it was recognised that the necessity to provide older persons a higher cap to allow a “catch up” in retirement funding was necessary. Unfortunately the initial proposal was complicated by attempting to limit the higher catch up cap to those who did not have adequate superannuation savings already. The implications of this approach made the practical aspects too complicated and it has been replaced with a simpler model in this announcement.

We now have a higher contribution cap of $35,000 for older persons which does not need to consider the amount of superannuation already saved. This will start from 1 July 2013 for those aged 60 and over and then be available for those aged 50 and over from 1 July 2014.

The only concern with this measure is that the $35,000 has been described as an unindexed contribution cap which raises the question of does this mean that it will be fixed at $10,000 above the standard concessional contribution cap or is it a temporary measure again and will eventually be replace when the indexation of the standard contribution cap of $25,000 raises this cap to above $30,000 (estimated to occur in 2018).


Reforming the concessional contribution excess treatment
After much angst the excess concessional contribution tax mechanism will be overhauled to a refund mechanism. Effectively the basis that was introduced for one off excess contributions from 1 July 2011 will now apply to all excess concessional contributions not just the first time limited to amounts under $10,000.

The changes to that mechanism will be the application of the individual’s marginal tax rate rather than the top marginal tax rate on the contributions. Additionally interest will be charged to cover the time delay in the payment of the tax amount (ie the tax due on the date the contribution was made rather than when it is assessed as an excess contribution) and recognition that the earnings on the contribution were made in the 15% concessionally taxed environment and get to remain in that environment.

The rate of interest does need to be high enough to act as a disincentive to deliberately making excess contributions to obtain the concessional earnings.

The flow on effect of this measure will be that there will be no excess concessional contributions that then count towards the non-concessional cap and this will mean that some of the large excess non-concessional contributions tax bill will no longer occur.


Extending deeming to account based pension balances
It is proposed that the more favourable Incomes Test treatment of superannuation pensions compared with superannuation in accumulation phase or other financial assets will be removed. This will mean that deeming that applies to all other financial assets including superannuation accumulation balances will apply for the Incomes Test.

This will mean that persons with smaller balances in superannuation at age 65 and older will re-consider whether to retain these amounts in superannuation and particularly pension phase if there is no significant social security benefits. Aspects to consider in this will be whether the earnings on the amount outside superannuation would be taxable when taking into account access to the Low Income Tax Offset & the Senior and Pensioner Tax Offset which can result in income up to $30,685 without tax. Also in consideration will be whether or the death benefit will be taxable to adult children which would only apply to amount in the superannuation environment where there is a taxable component whereas assets outside superannuation do not give rise to this tax.


Provide concessional tax treatment for deferred lifetime annuities
One of the biggest challenges facing the superannuation system is that by moving to a defined contributions system responsibility for adequacy has fallen to the member and is directly impacted by both contribution and earning levels. This means that the potential for a person to outlive their savings will be directly affected by these issues. One measure to counter this longevity risk is to allow a portion of the saving to be put aside for the specific purpose of providing an annuity stream in the future.

Currently if you put an amount aside for future use it is not providing current pension benefits so the tax exemption on earnings does not apply. The consideration of making the earnings tax exempt if they are only used for a particular purpose has merit worth examining. We only hope that this measure is not just for life companies but also available for superannuation funds.


Confirmation of adjustments to the tax concessions available for contributions
The Government re-affirmed the announcement from the 2012 Budget to introduce a reduction in the tax break on concessional contributions for high income earners. This measure called the Superannuation Concession Reduction will apply to persons with income greater than $300,000 including concessional contributions.

The Government sees this measure as part of their response to the equity measures in the Henry Tax Review Recommendation 18 which called for a single level of concession available to each $1 of contribution irrespective of the income of the person making the contribution.

Taxable income (p.a.) Marginal Tax Rate Contribution Tax Rate Net effect without measures After Low Income Contribution After Concession Reduction
<18,200 0% 15% -15% 0% 0%
18,201 to 37,000 19% 15% +4% 19% 19%
37,001 to 80,000 32.5% 15% +17.5% 17.5% 17.5%
80,001 to 180,000 37% 15% +22% +22% +22%
180,001 to 300,000 45% 15% +30% +30% +30%
>300,000 45% 15% +30% +30% +15%

When combined with the $500 Low income superannuation contribution for those earning under $37,000 it doe produce a flatter level of contribution concession values but it uses three mechanisms compared with Henry’s single mechanism.


Imposition of a limit on the tax exempt investment income for pension funds
This measure will cap the exempt income that an individual receives in respect of pension balances to $100,000 per annum, with any excess being taxed at the superannuation concessional tax rate of 15%.

Confusion exists as on what exactly the tax will apply. The colloquial term of earnings is the figure that would appear on a members annual benefit statement, however this consists of the net effect of income received, expenses paid, realised capital gains & unrealised gains due to asset revaluation. Normally a superannuation fund does not pay earnings tax on all these elements.

Tax is only paid on the net effect of income received, tax credits, discounted realised capital gains and deductions. It is this taxable income rather than earnings that would be the likely target for this measure. Administratively the complexity of apportioning taxable income to each member balance, as well as reporting to the ATO for aggregation to determine who has this additional tax liability, makes this measure difficult if not unworkable.

Special transitional rules will apply in respect of capital gains that arise for assets prior to 1 July 2014.These are designed to limit the effect of the tax to only that portion of any realised capital gain made after the announcement or 1 July 2014 if this results in a lower gain.

The reasoning behind this measure is that the maximum tax concessions available to savings in superannuation are not unlimited but should be restricted to an amount that is reasonable for the provision of an adequate retirement. Until 30 June 2007 the superannuation system had a series of benefit limits which restricted the amount that would receive tax concessions on the benefits paid. The higher limit restricted the type of income streams used such that at least 50% had to be in the form of a non-commutable stream with no residual value. Benefits taken over these limits were taxed at the top marginal rate if drawn as a lump sum, or as fully assessable income with no tax concessions if drawn as a pension.

It is interesting to note that this measure does pick up the on Recommendation 19 of the Henry Tax Review which proposed that all earnings in superannuation should be taxed at a single rate. This report stated that “Now that superannuation pay-outs are tax-free, there is no clear rationale for retaining an exemption for earnings on superannuation income streams. The exemption was necessary while superannuation pay-outs were taxable so that a person did not pay tax on the earnings in the fund and again when they took them as income. Having a consistent tax rate on all earnings would also make the superannuation taxation system more sustainable given the ageing of the population.”


For any queries in relation to the 2013 Federal Budget update, please contact Philip La Greca on 1300 364 672.
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