According to the government, these changes are designed to improve the fairness, sustainability and efficiency of the superannuation system.
Here are the key changes:
Tax on investment earnings
From 1 July 21014, investment earnings above $100,000 pa from superannuation pension (income stream) will be taxed at 15%. Earnings under $100,000 will continue to receive a tax exemption. The government said this will only impact approximately 16,000 people who have large superannuation pension account balances. Assuming the rate of return is 5%, it will require an account balance of $2 million in order to earn $100,000 in interest. I don’t think anyone who has $2 million in superannuation will complain too much given that the first $100,000 is tax-exempt with a saving of $15,000 already.
This $100,000 on tax-free earnings will also include any capital gains realised but it depends on when the assets are purchased and sold as there are transitional rules apply.
Currently, you pay no tax on any investment earnings received from an income stream account. However, earnings from superannuation during the accumulation phase are taxed at 15%.
Superannuation is taxed in three stages – tax on concessional contributions at entry (15%), tax on earnings when contributions are invested (15%) and tax on exit when you withdraw the benefit (depends on age and benefit components). It should be noted that currently no tax applies if you withdraw the benefit after the age of 60.
Concessional contributions cap
The current concessional contributions cap is $25,000 pa for everybody regardless of age. This means that $25,000 is the maximum amount you can put in superannuation each year from which you receive a concessional tax treatment, i.e. you only pay 15% tax on the amount.
From 1 July 2013, people aged 60 and over will be able to put in a maximum of $35,000 pa, and from 1 July 2014, this amount will also apply to people aged 50 and over.
It is expected that from 1 July 2018, everyone regardless of their age will be able to put $35,000 pa to superannuation.
The contributions cap refers to the maximum amount of money a person can put in superannuation without paying an additional tax. The amount under the cap receives concession tax treatment at 15%. Really, there is no limit as to how much you can put in superannuation; however, the amount above the cap is subject to excess contributions tax.
Concessional contributions refer to a contribution made by your employer. This includes the compulsory superannuation guarantee, salary sacrifice and any other employer contributions. A personal contribution that you have claimed as a tax deduction is also counted as a concessional contribution.
The government previously planned to increase the concessional contributions cap to $50,000 pa for a person aged over 50 if their account balance is under $500,000. This initiative has been scrapped by the government as it is hard to administer.
Tax on contributions above the cap
Under current legislation, concessional contributions up to the cap are concessionally taxed at 15% as stated above. The amount in excess of the cap is taxed at 46.5% and this known as an excess contributions tax (ECT).
Since 2011/12 financial year, the government has allowed anyone who has exceeded the concessional contributions cap by less than $10,000, to withdraw the excess amount from their superannuation account and instead take it as an income. By taking the excess amount as an income, you’ll only be paying tax at your marginal tax rate instead of 46.5%. Of course, this wouldn’t make any different if you’re on the highest marginal tax rate.
This is a one-off opportunity offered to you by the ATO the first time you exceed the cap. Whether you’re accepting the offer to withdraw the excess amount or not, you’ll not be eligible again.
Under the new rule recently announced and if the legislation is passed, the government will allow anyone who has exceeded the concessional contributions cap to withdraw excessive amount so they don’t have to pay 46.5% tax. The amount withdrawn will be taxed at the individual’s marginal tax rate.
Contributions tax on high income earners
Last year the government announced they would introduce legislation to increase the contributions tax from 15% to 30% for anyone earning $300,000 or above. To date, this legislation has not been introduced into the parliament; however, the government said the law would be passed by the end of the financial year.
There are no changes made to tax on benefits upon withdrawal.