You can budget on a super surcharge!

The media was a buzz over the weekend regarding the proposed budget announcement to increase the contributions tax rate from 15% to 30% for individuals who earn more than $300,000 p.a.

In 1996, the Coalition Government introduced the super surcharge to help ‘fix the mess’ of the previous Labor Government. This time, it appears the Labor Government is introducing this to fix their own mess, as they continue their pursuit to deliver a budget surplus.

Building greater equality into tax concessions isn’t going to come with any major objection as the introduction of the additional tax rate will supposively only affect 1.2% of the population.

Interestingly from reading various media sources, the inclusion of tax-free benefit payments (pension & lump sums) post 60 could capture more people than anticipated if appropriate planning does not occur.  A simple recontribution strategy appears it could affect the calculation should the individual also be making concessional contributions.

It is highly likely the sector impacted the most by this additional contributions tax will be SMSFs. I think it would be a fair assumption that a large number of individuals with taxable incomes in excess of $300,000 are likely to only to be able to contribute $25,000 for 2012/13. This will either be due to the individuals:

  • being under age 50, or
  • the taxpayer is over 50 and their account balance will be greater than $500,000.

Whilst the maximum salary on which an employer has to pay compulsory super is 175,280 (2011/12), some employers may pay the SGC for an individual based upon their salary level.  For somebody earning $300,000, 9% SG contributions would be $27,000, meaning not only 30% contributions tax, but 46.5% excess contributions on amounts above $25,000.

With a broad income test that is likely to apply, there will be very little by way of strategy to avoid reaching the $300,000 threshold.  But, as always, the devil will be in the detail.

Budget night on 8 May 2012 is again shaping up to include further changes to superannuation…

Extended contribution caps to cause more pain with Excess Contributions Tax

The extension to the contribution cap rules is going to become a massive headache for super fund members and advisers

The reaffirmation in the Federal Budget of the concessional contribution cap extension for those over 50 years of age where their account balances are under $500,000 is likely to bring further problems to the already growing area of Excess Contribution Tax (ECT).

Whilst the government has announced relief in the Federal Budget for excessive amounts of less than $10,000 to be refunded back to individuals (and assessed personally), this $25,000 extension to the contribution caps from 1 July 2012 poses a significant problem for those who incorrectly calculate their member account balance (under $500k).

There has been a significant amount of submissions made to Treasury on their discussion paper regarding these proposed changes.  The concerns of industry about the administrative difficulties of this legislation appears to have fallen on deaf ears (even though I recently heard Minister Shorten at a breakfast call this proposed legislation “Nightmare on Contribution Street, Part V”).

So how do we deal with a situation where a member has exceeded their contribution cap by $25,000 under the guise that their account balance was less than $500,000?

Under the proposed changes announced within the budget, a member appears to have no ability to remedy to this situation and is likely to be issued with an ECT assessment of $7,875 on the concessional contributions ($25k x 31.5%). Worse still, where the member has already reached their non-concessional contribution limit, a further ECT notice will be issued for $11,625 ($25k x 46.5%), being a breach of the non-concessional contribution (NCC) limit.  A 93% tax bill on the $25k contribution above the ‘ordinary’ concessional contribution limit!!  How is taxing somebody $23,250 on a $25k contribution providing an incentive to save for retirement?

How could you get the $500,000 balance wrong?  Consider some of the following ways:

  • Some or all of the SMSF assets have not been valued to market value (Stronger Super recommendation with likely effective date from 1 July 2012);
  • Member has additional superannuation outside of the SMSF (e.g. Lost Member Account) that gets aggregated when counting total member benefits by the Australian Taxation Office;
  • Benefit amounts taken (i.e. pensions and lump sums) have not been added back to determine the $500,000 account balance (this is 1 of 3 alternative options within the consultation paper)
  • An amount held within Fund Reserves has not been attributed back to the members for the purposes of the account balance calculation (as recommended within the consultation paper)
I believe that it would be in the government’s best interest to allow for a release authority on contributions up to $25,000 (rather than $10k) to ensure that people are not unfairly caught in believing they qualified for the extended cap. Any amount returned to the member would be taxed at the individual’s marginal tax rate.
Let’s hope we can see some common sense prevail when this legislation is being drafted and eventually introduced.  I’m not one for holding my breath though…

Watch our previous FREE webinar or “Dealing with Excess Contributions Tax”

What super changes will occur in the Federal Budget?

Budget night in May each year regularly throws up changes and challenges, and this one appears to be no different.

Retirement policy with an aging population continues to grow in importance, but it is an area that Governments can’t help themselves to fiddle with when endeavoring to “balance the budget”.

This year appears to be an interesting budget with the government already talking about a “tightening of the purse strings”.  This tightening will be expected to flow through to superannuation as well, but to-date the Government has remained tight-lipped on any details.

What we have heard is that the Government through Minister Bill Shorten has announced positive changes to address the unfairness of Excess Contributions Tax (ECT).  Whilst this is positive news, the real question is how far is the government going to go with this?  My suspicion is a change to the 93% tax rate, but not much else!!  Don’t expect it to be retrospective either, therefore meaning that clients who have already been issued assessments are stuck with them…

Listen to the webinar, “Dealing with Excess Contributions Tax

Below is my wish-list for Budget night:

  • An increase to $800,000 as an account balance to allow $50,000 of concessional contributions – whilst this legislation is complex and an administration nightmare (read my previous article), it appears we are going to have to live with it for the time being…  a key problem with the legislation is that the $500k limit suggests to Australian’s that this is an adequate super balance for retirement, when clearly it is not.
  • Abolition of age-based limits for super guarantee – individuals regardless for the length of time they work should receive super guarantee payments (9% SGC).  Let’s hope for some positive news beyond the proposed extensions to age 75.
  • Abolition of the work test to contribute beyond age 65 – I would like to see an ability for people to be able to continue to contribute into super to age 75 regardless of working status.  I have no problems in limiting the use of the ‘bring-forward’ rule to age 65, but the more we encourage retirement savings the less reliance on government through age pension.
  • Removal of the 10% rule for super contribution – wouldn’t it be great if regardless of the levels of employment income and source of contributions, that a member could receive either $25k or $50k of concessional contributions.  With “Reportable Employer Super Contributions” now also having to be factored in, this area is unnecessarily complex.
  • Further extension to the 50% reduction for minimum pensions – We have now had 3 years of minimum pensions at half the normal pension percentages that apply for account based pensions.  Unfortunately, I don’t think we are out of the financial doldrums yet, and further pension relief appears warranted.

Any potential “bombshells”?

It is worth remembering that the Government is sitting on many of the recommendations prepared for them from the Henry Review.  These recommendations include the introduction of a flat 7.5% rate of taxation across both accumulation and pension phase.  Would the government be so bold to introduce something like this?

The only thing we know for sure is that the Government has made a commitment to return the budget to surplus by 2012/13.  This will mean difficult changes that will impact all Australians.  Superannuation seems like the easy tax grab – just look at the halving of the contribution caps 2 years ago fill the coffers!!

I look forward to providing a full wrap of the budget impact for SMSF on Wednesday.

Have you visited the new SMSF Academy website?

Minister Shorten confirms review into Excess Contributions Tax

It was very pleasing to read today in the Australian Financial Review, that Assistant Treasurer and Minster for Financial Services & Superannuation, Bill Shorten has confirmed that Treasury is reviewing the current Excess Contributions Tax (ECT) penalty regime and is looking at options to change the laws.

The Minister was quoted as saying, “I am fully alive to it and hopefully will have an answer soon.”

With more than 188,000* people having already been potentially caught with excess contributions tax, and 65,000 excess contribution breaches in 2009/10, this issue appears to have become a political time bomb for a government already under-fire.   The collection of excess contribution tax revenue in respect to the 2009/10 tax year hasn’t even started, which we know is the big issue as a result of the government halving the concessional contributions cap!!

Listen to my recent webinar on Dealing with Excess Contributions Tax

I attended a breakfast last week where Minister Shorten shared his concerns on this issue.  His views appeared to support the fact that a 93% tax regime is grossly unfair and that action needed to be taken to remedy this issue.  The statistics raised by the Minister suggested less than 1,000 individuals have been subject to the 93% penalty tax, which only applies where both the concessional and non-concessional contribution caps have been breached.  I feel we will see positive action taken in respect to this matter in the Federal Budget next month (May).

I don’t have the same feeling though with changes occurring in respect to the existing ECT penalty tax regime for concessional contributions, where an additional 31.5% tax is applicable on top of the 15% contributions tax. Whilst Minister Shorten even acknowledged that he has been caught out with an ECT assessment, the fiscal reality is that the Federal Government has made a significant commitment to return the economy back into surplus by 2012/13.  As a result, I believe there is little scope for the government to currently consider making significant changes to the current revenue collections for ECT.

The ‘cynic’ in me says to expect more positive news on this issue and improvements to the contribution caps in the lead into the next Federal election, not the next Federal Budget.

It is important to remember that without an appropriate penalty regime to act as a deterrent, we may see individuals abusing superannuation retirement policy, knowing that there is little or no penalty by not complying with the law. However, there is surely a better balance between policing the contribution caps and encouraging people to save for retirement.  Hopefully, this is the start of finding the right balance!!

Click here to download my webinar of Dealing with Excess Contributions Tax

* Thomsons Reuters, 9 March 2011, Excess superannuation contributions tax – how much is collected?

(C) The SMSF Academy 2012
%d bloggers like this: