Taxing earnings on super assets supporting income streams
At present, all new earnings (such as dividends, rent and interest) on assets supporting income streams (superannuation pensions and annuities) are tax-free. Whereas earnings in accumulation phase (that is when you are building not taking super) are taxed at 15%.
From 1 July 2014, the tax exemption for earnings on superannuation assets supporting income streams will be capped at the first $100,000 of future earnings per individual. Earnings above $100,000 will be taxed at 15% (the same concessional rate that applies to earnings in accumulation phase).
So, earnings on superannuation assets supporting income streams will be tax free up until $100,000 and then taxed at 15%.
The $100,000 threshold will be indexed to the CPI and will increase in $10,000 increments.
Special arrangements will apply for capital gains on assets purchased before 1 July 2014:
- For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2014;
- For assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
- For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.
Account based pensions lose preferential Centrelink treatment
Currently, account based pensions provide a tax-free retirement income stream for the member and flexible access to capital. Account based pensions also receive preferential concessional treatment under Centrelink pension income testing arrangements compared with income from other assets, such as dividends from shares or interest from term deposits which is subject to deeming.
From 1 January 2015, new superannuation account based income streams will be subject to the standard pension deeming arrangements, which could increase the level of income that is assessed under the income test for Centrelink support.
This reform will have a greater effect on clients who are assessed under Centrelink’s income test as opposed to the assets test.
A further effect could be for clients who hold a pre 1 January income stream product and are looking to change the provider of that product. A change of provider may result in a new post 1 January 2015 account based income stream being commenced and hence caught under the changes. We’ll wait to see the detail of the legislation.
Reforming excess superannuation tax
Under current arrangements, concessional contributions that exceed the annual cap are taxed at the top marginal tax rate of 46.5%.
The proposed reforms will allow individuals to withdraw any excess concessional contributions made from 1 July 2013 from their super fund. These excess concessional contributions will then be taxed at the individual’s marginal tax rate plus an interest charge.
It is a positive reform measure and should eliminate the inadvertent triggering of the 3 year bring forward rule on non-concessional contributions.
Higher contributions cap changes brought forward for over 60s
The Government has now announced that a higher contributions cap of $35,000 will now apply from 1 July 2013 for those 60 and over, and 1 July 2014 for those 50 and over.
In addition, the Government has decided not to limit the higher cap just to those with super balances below $500,000. It will now apply to everyone who meets the age tests.
For everyone else, the contributions cap will remain at $25,000 (with indexing returning to the cap from 1 July 2014).
So, to sum it up, if you are 60 and over at 1 July 2013, if the proposed changes become law, your concessional contributions cap will be $35,000. If you are 50 or over on 1 July 2014, your concessional contributions cap will be $35,000.
Lost superannuation inactive account threshold change
From 31 December 2015, the Government has announced that the account balance threshold below which inactive accounts, and accounts of uncontactable members, are required to be transferred to the ATO will increase to $2,500. On 31 December 2016 it will then increase again to $3,000.
If you have any queries please don’t hesitate to contact us.