The Institute of Public Accountants (IPA) looks at the issues and implications associated with taxing super incomes over $100,000.
On 5 April 2013, the Minister for Superannuation and Financial Services, The Hon Bill Shorten MP, made a surprise announcement that the government planned to tax income earned by superannuation funds in pension phase where the income was over $100,000 per annum. This announcement came as shock to most as there had been no prior suggestion that the government would tax income in pension phase.
The rationale of the government was that those with large superannuation balances could earn considerable sums from their retirement income. As this is currently untaxed such high income earners were being rewarded with significant tax advantages, in fact receiving greater government benefit than those on the pension. The government said this was unfair and that the proposed tax would reduce some of the tax benefits of the truly wealthy. The government claims that without the proposed changes the benefits to high wealth individuals would become unviable in the long term.
The government announced that from 1 July 2014, future earnings (including dividends and interest) on assets supporting income streams will be tax free up to $100,000 a year. Earnings above $100,000 will be taxed at the same concessional rate of 15 per cent that applies to earnings in the accumulation phase.
The government came to the $100,000 by postulating that if the average return on investment in superannuation is 5 per cent, then it would take $2 million in superannuation assets to earn $100,000. Given the small number of funds with more than $2 million in assets it was determined that only a small fraction of superannuation account holders would be affected.
Some have questioned such calculation and with recent performance by retail and industry funds in double digits it will take significantly less than $2 million to earn $100,000 in a year and in effect the government was taxing better performing funds higher than poor performing funds.
Who is impacted?
The reality is that even with a return to double digit returns by funds, the number of funds earning $100,000 or more will be relatively small. The government has also committed to ensuring that it finds a way of taxing high wealth individuals who are in defined benefit schemes such as politicians and judges.
The government projects the policy to impact 16,000 individuals and bring in $350 million, which means only a very small amount of superannuants are expected to be impacted. One has to question whether it is worthwhile devoting so much resources into legislation that is only going to impact so few, particularly given there are so many more pressing issues on the regulatory front.
The government’s legislative response to taxing superannuation contributions by those earning over $300,000 extends to over 50 pages in length and there is some concern that this measure will also require significant legislative amendment.
Sale of lumpy assets
One area of concern that has not been answered by the government’s announcement is the impact on superannuation funds if they sell a lumpy asset in one year. Will this be deemed to be 'income' in that year for the purposes of the proposal? If so the measure may actually impact considerably more people. Many SMSFs have property included in their investment portfolio. The sale of such an asset will generally be more than $100,000. This may mean that in one particular year a fund may be hit by the tax when its assets are significantly less than $2 million. This would seem to be contrary to the government’s intention. We will therefore have to wait to see the proposed legislation before we can answer this question.
In the end, one has to ask why the government has bothered with this proposal. It has provided further evidence of a government intent to tinker with superannuation and one that is keen to try and drive a wedge between those that are 'wealthy' and the rest of us. There are also concerns that once the government starts taxing some income from superannuation it would not take too much for it to lower the threshold and bring in significantly higher income in the future. There is also concern that the proposed law will be complex and lengthy and make it more difficult for funds to administer their superannuation accounts.
Reece Agland is a senior policy advisor at the IPA.
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