What was in the Budget (and leaked before) was generally positive news, such as the Excess Contributions Tax (ECT) arrangements, the increase in the concessional cap and changes to taxation of deferred lifetime annuities – all initiatives that the IPA had been demanding as part of our pre-Budget submission. The major negative from the Budget: taxation of income over $100,000 for funds in pension phase (announced before the Budget), which will only affect a small number of taxpayers.
Excess Contributions Tax (ECT)
The ECT is one of the most punishing taxes in Australia. While impacting only a small number of taxpayers, it does so unfairly. The ATO’s strict interpretation of the law also makes it nearly impossible to unwind unintended breaches.
The Government has promised to tackle this issue and has now announced plans to change the rate of the ECT. Currently, it is the highest marginal tax rate; this will be changed to the person’s marginal tax rate, plus a small interest charge.
For those whose tax rate is less than the top rate, this will bring some relief. For those on the highest tax rate, the addition of an interest charge may well increase the tax.
But the Government is at least starting to look at reforming the ECT.
Concessional caps
The main superannuation issue on which the IPA has been lobbying the Government is an increase to the concessional caps. We believe they are currently too low, particularly for older Australians with low super balances.
The concessional cap was originally $50,000 but was reduced to $25,000 for taxpayers under 50 and later for those over 50. However, there was a promise that those over 50 with low superannuation balances (below $500,000) would still have a $50,000 cap.
The Government has now promised to increase everyone’s concessional cap to $35,000 by mid-2014. However, to pay for this, the Government has reneged on its promise to increase the over-50s’ low-balance cap to $50,000.
While we are glad to finally see some upwards movement in the concession cap, we are disappointed this has come at the expense of those over 50 with low superannuation balances. Many of those affected are women who have taken time out of the workplace to raise children. We think there is room to assist this particular group as they near retirement and need these higher caps.
Taxing earning in pension phase
Currently, all income paid out by a fund from assets supporting income streams is tax-free. The Government has determined this is overly generous and plans to tax earnings above $100,000 from assets supporting an income stream in retirement.
The proposed tax rate would be 15 per cent; the $100,000 threshold is to be indexed. Capital gains that are subject to the tax will receive a 33 per cent discount, for an effective 10 per cent rate.
Deferred annuities
As part of our pre-Budget submission, the IPA called on the Government to improve the tax position of lifetime annuities to ensure there were no tax disincentives to people choosing deferred annuities over allocated pensions.
As of 1 July 2014, deferred lifetime annuities will be accorded the same concessional tax treatment that superannuation assets supporting income streams receive. That will give retirees more choice.
Conclusion
The Budget is a mishmash of positive and not-so-positive policy on superannuation. While we welcome some positive news on the ECT and an increase in the concessional caps, this is undone by the decision to not increase the caps further for those over 50 with low balances and by the new tax on earnings over $100,000 for funds in pension phase.
