2013 Federal Election: new super changes summary (April 2013)
On 5 April 2013, federal treasurer Wayne Swan, and Minister for financial services and superannuation, Bill Shorten announced a bucket of changes to the existing super arrangements. This article is a summary of the announced changes, and you can find more detail on the proposed changes in separate SuperGuide articles.
The federal government is going to make the following changes to your superannuation arrangements:
New tax on pension assets. Introduce a new 15% tax on pension earnings beyond earnings of $100,000 a year – effective start date is 1 July 2014. See SuperGuide article New tax on pension earnings over $100,000.
No $50,000 cap for over-50s, but a $35,000 cap for over-60s at first. The government has killed the proposed $50,000 cap for over-50s, for those with less $500,000 in super. Instead, they plan to introduce an unindexed (smoke and mirrors) concessional contributions cap of $35,000 for individuals aged 60 and over, from 1 July 2013. The same unindexed cap of $35,000 will apply to those 50 years and over from 1 July 2014.
Reform the excess contributions tax debacle. The federal government will allow individuals to withdraw any excess concessional contributions made from 1 July 2013 from their super fund. These excess contributions will be taxed at the individual’s actual marginal tax rate, plus an interest charge (as would happen for income tax paid late to the ASTO), rather than the top marginal tax rate. If you’re already on the top marginal tax rate, then you will be hit with a new interest charge.
Extend deeming rules for Age Pension so apply to superannuation pensions, from 1 January 2015. The government proposes to extend the deeming rates applicable to financial investments (when assessing against the Age Pension income test), to also apply to superannuation pensions. Currently, superannuation pensions are counted against the Age Pension income test through a special calculation that recognises the return of capital that forms part of every super pension payment. This change is likely to cause a lot of confusion, and create a massive number of unhappy retirees.
Extend concessional tax treatment to deferred lifetime annuities, which means these products have same concessional tax treatment as superannuation assets supporting super pensions. This change takes effect from 1 July 2014.
Increase the account balance size for treating super as lost. In the 2012-2103 Mid-Year Economic and Fiscal Outlook, the government announced that from 1 July 2013, inactive accounts of $2,000 or less would be transferred to the ATO, and they would receive ‘interest’ equivalent to CPI increase. From 31 December 2005, the inactive account threshold will increase to $2,500, and from 31 December 2006, will increase to $3,000.
Establish a Council of Superannuation Guardians. This council will monitor a proposed Charter of Superannuation Adequacy and Sustainability, and assess future policy against this Charter and report to Parliament.
Labor announces its proposed changes
On April 5, 2013 Treasurer Wayne Swan, and Minister for Financial Services and Superannuation Bill Shorten together made an unexpected announcement ahead of the budget on the proposed changes to superannuation. They did this to settle internal dissent within the party, to arrest a decline in the opinion polls, and to pre-empt a hostile advertising campaign by the financial servfices industry.
Labor has had to abandon its promise for a budget surplus this year as a result of lower than expected revenue from the mining tax. The government admitted some months ago that it was looking at reducing the tax concessions introduced by the Liberal party in exempting retirees from paying tax in the pension phase. Such a measure would help solve its budget deficit problem, but it has been fearful of a backlash from voters.
The announcement has effectively silenced opposition. Super is still an attractive investment vehicle to the relief of the finance industry. Retirees have been reassured that their benefits not be lost. Dissidents within the party are now hopeful that voters will accept the changes. The government appears to have successfully sold the changes are necessary to make superannuation sustainable and not just a benefit for the wealthy.
The central proposal
The core proposal is to remove the tax concessions for those retirees with super balances in excess of $2 million, who if the return was 5% per annum, would generate a pension revenue above $100,000. It is claimed that only about 16,000 retirees, based on a super-balance of $2 m and a 5% return, would be affected.
The sales pitch suggested that ordinary Australians would be envious of anyone with an income of $100,000 or more. This is a misleading statement however since the cap applies to the income generated by the fund, not the pension payments, which may very well be much less than this.
A reasonable benefits limit sensibly capped the level of investment in superannuation up until 2007. This proposal is not a return to RBL calculations, but rather a threshold for the removal of tax concessions. In a sense the government is double-dipping with this tax, in-as-much as taxation has already been paid on entry to the fund, and the income in the accumulation phase has also been taxed.
The key threshold is pension income above $100,000 equal to a 5% return on $2 million.
Trish Power points out in her articles referred to above, that the long-term average return on super-funds, apart from the five years of the global financial crisis was about 7%. At this level of return, easily achieved if the portfolio generates substantial fully franked dividends, taxation could apply when super-balances were in excess of only $1.43 m.
Super-fund returns vary enormously from year to year. After five years of excellent returns, even many professionally managed funds would have had a few years of negative returns after the global financial collapse. The fairest way to calculate such a variable tax liability would be to average out the investment income over a period of 3-5 years.
Income on super assets also results when capital gains are realized by the sale or trading of assets. Assets acquired before April 5, 2013 will be quarantined from capital gains tax for ten years, (2024). Assets acquired after July 2014 will be subject to a capital gains tax of 15% presumably on all assets, not just those in excess of the $2 m threshold. This measure will deter retirees from realizing on their capital gains when appropriate. Capital losses can be offset no doubt against the gains, but in years of negative returns there would be no benefit to the retiree, whose balance might never recover from large reductions of capital. It is not clear to me whether capital gains liability would be waived should the super balance fall below $2 million, but the income threshold of $100,000 be exceeded.
These changes would make it much more difficult to manage one’s self-managed super fund. The difficulties would be compounded by new deeming rules which would apply to superannuation as well as pension income.
How safe are retirees’ super investments?
A major consideration for retirees is the safety of their investment in super-funds. Australia now has about $1.5 trillion invested in superannuation, and the total is likely to reach $3 trillion within a decade.
- Retirees have discovered to their cost that money invested in superannuation is far from safe. Many retirees have lost their hard-earned savingsat the hands of unscrupulous advisers and operators. Even respected enterprises supported by superannuation funds have often failed without warning. Furthermore the regulatory authority ASIC is invariably powerless to help those who have lost their savings.
- The greatest threat to the safety of superannuation is inherent market risk. The global financial crisis resulted in a 30-40% decline in capital for many retirees. More common are pull-backs of the order of 10%, leading to a negative return. This may happen at intervals of perhaps 4-5 years. Retirees in a falling market still have to sell assets at the prevailing prices to draw their pension.
- Market risk is not always avoided by placing one’s super in a professionally managed fund. Indeed fund managers usually charge a fee of 1.5 to 2% of the funds under management regardless of the whether the fund returned a profit. Over two decades this amounts to 30-40% of one’s retirement capital. The finance industry receives about $2o billion per annum in fees, or 1.33% of the funds under management.
- Often overlooked is the effect of inflation combined with the run-down of capital on super savings. Most believe that investment income covers the effect of inflation but this would only be true if the interest was re-invested instead of being distributed as it is, to the beneficiaries as a pension. It progressively diminishes the buying power of the total amount under management. With a balance of $2m, at 3% inflation rate, buying power declines by $60,000 each year.
- Government changes to superannuation rules make retirees nervous. Changes usually diminish returns, and add to complexity
Superannuation remains a tax effective investment for retirees. It may be unwise however to rely on super to the exclusion of other investments.
We will have a greater need for good financial advice if these changes happen. It is often not smart for retirees to try to maximize government help by diminishing investment income. Retirees will often be better off by maximizing income even if it means paying more tax.
Certainty of return, simplicity of administration, and the cost of compliance requirements, are all important considerations for pension streams.
It would be helpful if the government could address the leakage of capital from superannuation funds by strengthening the hands of the ACCC and ASIC.
- Labor themselves divided by the politics of super. (someidiotblogger.com)
- Have Labor’s proposed changes to superannuation got the balance right? (thedunnthing.com)
- Super funds welcome certainty on tax changes (abc.net.au)
- Super changes will only hit 16,000: Swan (news.theage.com.au)
- Government ‘double dipping’ on super tax (abc.net.au)