You may have heard some of the news recently about the proposed changes to Superannuation legislation that will be tabled in Parliament if the current government is re-elected. If you did read about them, you might be concerned about how these changes could affect you. So I thought I’d give it to you straight on what the changes are all about. No jargon, just the facts.
Whatever their impact for you, it’s important not to lose sight of the fact that super is still the most tax effective form of investing for your retirement, by a very big margin.
Potential changes to tax on super pensions (may affect SMSF property investors)
For those who have either bought property or are taking steps to buy property within their Super Fund, there is potential for the proposed changes to affect you when you reach the stage where you are drawing an income from your Super Fund. Currently when a capital gain has been realised on the property in your fund, you pay no tax on that gain, but under the new legislation capital gains tax will likely apply. Let me explain how.
If the new laws are passed by Parliament, special arrangements would 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 2024;
- 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 to 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.
Interestingly, the actual capital gains tax rate on Superannuation was not discussed. It is assumed that the tax rate would remain at just 10% (or 2/3rds of 15%). This is still far superior to the marginal tax rates you would have to pay if the same asset was bought outside Super and on that basis it is not a large cause of concern, but it is worth noting!
Another proposed change affects pension income streams for high net worth individuals within Super. Australians presently pay no tax on money they are drawing down (earning) from their Super as a pension after age 60. This situation is highly likely to remain as is.
However for those who are earning more than $100,000 per annum income from a super fund which is paying them a pension, they would now pay up to 15% tax on the amount of income above $100,000 per annum being earned internally in their fund. To summarise who this will impact, based on current income earnings rates of say 5% per annum, you would need a balance of around $2 million in assets in your Super Fund to be affected by this change. You can see why the Government indicated there are only a few people who will be affected by this change.
Potential changes to concessional contribution limits (may affect over 50’s soon)
Another notable proposed change to Superannuation, is the cap on “Concessional contributions”. As explained in an earlier article, Concessional Contributions to Super are those contributions where a tax deduction is claimed by someone. These include Superannuation Guarantee Contributions (SGC), salary sacrifice to Super and personal contributions made for which a tax deduction is claimed.
Currently, eligible individuals can contribute up to $25,000 into their Super Funds in concessional contributions before they reach their contributions cap/limit (breaching the limits can have significant tax penalties).
Under the proposed change that contributions limit will rise to $35,000 for those over age 60 from July 1st 2013, and the same amount will apply for those over age 50 from July 1st 2014.
This is a great incentive to save more in your Super for retirement because the average 60 year old income earner (someone who earns between $37,000 and $80,000) who can afford to add extra contributions can save up to an additional $1,500 a year in tax from saving an additional $10,000 towards super. The savings are even greater for those earning over $80,000. For the rest of us (those aged below 50), the proposal will not see a change of contribution limit in the short term.
Low Balance Accounts & MySuper (affects those not paying attention to super)
The government has also made a proposal for some minor modifications to the level at which it transfers inactive super accounts with very low balances to the Tax Office where the rightful owner of the account cannot be found or contacted. Currently, this only occurs to accounts with balances below $2,000 but this threshold will be raised to $2,500 in December 2015 and to $3,000 in 2016.
There is also a new “default” setting for those who don’t choose their own Super Fund. From July 1st 2013, when an employee doesn’t inform their employer of which fund they would like their super paid into, they will automatically go into a new “MySuper” product, which is a very basic, low cost Super fund.
While this fund has no commissions or entry fees and is designed to be a one-size fits all, it may not suit everyone’s individual requirements, which is why it is always wise to get advice on what is the best super strategy for you!
In summary, if they go through these proposed changes really are quite cosmetic and will have little impact on most of us, with many gaining positively from them.
What is important to remember is just how important super is to you as a vehicle for funding your retirement. This becomes even more critical when you realise that some recently released research showed that 66% of people over the age of 45 rely on a pension from the Government, as their main source of income. This means around two-thirds of retirees are surviving on the current pension levels of just $712 per fortnight for singles and $1,073 for couples. That is hardly going to fund the kind of retirement you’d like to enjoy!
If you have any questions in regard to these recent changes to Super or you would just like a chat about how to fund your retirement, please don’t hesitate to contact us by email: firstname.lastname@example.org or call 03 9868 7500.