On Friday 5th April 2013 the Federal Government announced a number of proposed superannuation reforms. Following is a brief summary of the proposals:

1. Taxation of pension earnings in excess of $100,000 per member – Commencing 1st July 2014 all earnings on superannuation assets supporting income streams for superannuation pensions will be taxed once those earnings exceed $100,000. Earnings up to a $100,000 threshold per member will be tax free; however earnings above $100,000 will be taxed at 15% (current rate of income tax applied to earnings generated by a superannuation fund in accumulation phase). The $100,000 threshold will be indexed annually by CPI in increments of $10,000.

Administration of this proposed measure is likely to be difficult, particularly where an individual is a member of more than one superannuation fund.

2. Realised Capital Gains – realised capital gains will be included in the determination of earnings on superannuation assets supporting superannuation pension streams and it is proposed that transitional rules will apply for assets purchased prior to 1st July 2014. Proposed transitional rules are:

a. Realised capital gains on assets acquired prior to 5th April 2013 – only the capital gain that has accrued after 1st July 2024 will be taxable; and
b. Realised capital gains on assets acquired between 5th April 2013 and 30 June 2014 – superannuation funds have a choice of applying the tax to the entire capital gain or only the portion of the capital gain that accrues post 1st July 2014;

At this stage it is unclear as to whether the current discounted tax rate of 10% for assets held for greater than 12 months will continue to apply.

3. Increased concessional contribution caps – a $35,000 per annum cap for older taxpayers is proposed to apply to:

a. Taxpayers aged 60 and over from 1st July 2013; and
b. Taxpayers aged 50 and over from 1st July 2014.

The Government has also stated that they expect that the general concessional contributions cap of $25,000 per annum will reach $35,000 per annum at 1st July 2018. Further the Government has also advised that the increased cap will not be restricted to taxpayers with superannuation balances of less than $500,000, as previously announced.

4. Excess contributions tax – the proposals will allow an individual who makes an excess concessional contribution from 1st July 2013 onwards to withdraw that excess from their superannuation fund. Excess contributions will be taxed at the individual’s marginal tax rate and will incur an interest charge to recognize that the tax is collected later than normal income tax.

5. Deeming rules to apply for the purpose of the age pension income test to account based superannuation income streams commenced after 1st January 2015. Account based income streams held by age pensioners prior to 1st January 2015 will be grandfathered indefinitely and will continue to be assessed for age pension purposes for the life of the income stream. Please note that this proposal will not be applicable to non-purchased pensions such as a public service defined benefit pension scheme.

Further clarity is required regarding:

a. The application of the grandfathering rules where a pension in commenced before 1st July 2015 by an individual who is not eligible for the age pension until after this date; and
b. The need for pensions to be reversionary to ensure that a surviving spouse retains the grandfathered status of the income stream.

6. Deferred lifetime annuities will be concessionally taxed, receiving the same concessional taxation treatment superannuation assets supporting an income stream will receive from 1st July 2014.

Should you require advice regarding the above please contact Alison Foenander of Donegan’s Wealth Advisers on 03 9670 5232 or at alisonf@donegans.com.au.

Compiled and written by Alison Foenander