Adapting to superannuation changes

The May 2011 Federal Budget contained a number of proposed superannuation changes. However, they are unlikely to cause any significant change in the way clients will go about building and protecting their wealth, writes John Perri.

In the superannuation arena, there are two key proposals from the 2011 Federal Budget – refund of excess concessional contributions, and phasing out of the pension drawdown relief – of note for financial planners.

Refund of excess concessional contributions

In the lead-up to this year’s Federal Budget, the issue of excess contributions tax (ECT) was one that received some attention. Prior to the budget, the Australian Taxation Office (ATO) released statistics indicating that the average excess concessional contribution for the 2009-10 financial year stood at $6,901.

To provide some relief, the Government will provide eligible individuals with the option to have excess concessional contributions refunded from their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.

However, this will only apply where an individual has made (or received) excess concessional contributions of no more than $10,000 (not indexed) in a particular year, meaning that any breach over $10,000 (even if only $1 over) will not be covered by this measure.

This measure will only be available for the first breach that occurs in respect of the 2011-12 or later years. That is, this measure will not apply to any breach in respect of earlier years, or to any subsequent breaches after the first – it is a once-only measure.

Case study

John is aged 40 and is on the 38.5 per cent marginal tax rate (MTR). During the 2011-12 financial year, John receives $32,500 in concessional contributions. 

If we assume that the concessional contribution cap is $25,000 for the 2011-12 financial year, then John would have $7,500 of excess concessional contributions. 

As a result, in addition to the 15 per cent contributions tax paid by his fund, this excess amount will attract a further tax penalty of 31.5 per cent – a total tax rate of 46.5 per cent, or $3,487.50.

However, as this would be John’s first breach in respect of the 2011-12 or later financial years, under this proposed measure he would be able to have his excess contributions refunded to him and taxed at his marginal tax rate instead. And, if John were to apply this measure, the $7,500 excess would be refunded to him and taxed at 38.5 per cent, or $2,887.50.

Note that if John were to subsequently exceed his concessional contribution cap a second time, after the 2011-12 financial year, he would not be eligible to benefit under this measure in respect of the subsequent breach(es), as this measure will only be available once.

While it is too early to come to any conclusions, the introduction of this measure raises a number of interesting prospects, all of which require further clarification. Some of these include:

• We would expect the refunded contribution will no longer count towards the member’s non-concessional cap, hence reducing the double-counting that can otherwise arise;
• Into which income tax year’s assessable income would the refunded contribution be included? If it is to be added to any financial year other than the one in which the contribution was made, could there be a limited one-off tax arbitrage opportunity if the member’s MTR has decreased?;
• If the excess is created as a result of superannuation guarantee contributions – for example, professionals who may work for multiple organisations – does this provide a limited one-off way for them to gain access to SG contributions?; and
• In situations where the member is in the top marginal tax rate (46.5 per cent, ignoring flood levy in 2011-12), the making of concessional contributions in breach of the cap will not necessarily be detrimental. This is the case, given that these excessive contributions are similarly taxed at 46.5 per cent (15 per cent contributions tax and 31.5 per cent excess contributions tax).

However, it is worth noting that making additional concessional contributions will not be an effective strategy in situations where:

• The member is not in the top marginal tax rate; or
• If the excess concessional contribution, which also gets counted against the non-concessional contribution:
  • creates a breach of the non-concessional contribution cap; or 
  • causes an unwanted trigger of the non-concessional contribution cap bring-forward rule.

 Phasing out of the pension drawdown relief 

In recent years, the government has provided drawdown relief to provide people who hold account-based, allocated or market-linked (term allocated) pensions with the ability to draw 50 per cent of the legislated minimum pension payment (based on their age). This enables more of their money to remain within the pension, with the intention of preserving their balance.

In this year’s Federal Budget, the Government has announced that this relief will be reduced from 50 per cent down to 25 per cent for the 2011-12 financial year, and will be completely removed for 2012-13 and future years.

The removal of this relief will mean pension incomes will compulsorily increase for clients who had elected to receive less than the legislated minimum which may have a flow-on impact for the:

• Taxation treatment of pension incomes (for those aged under-60); and
• Calculation of Centrelink/DVA entitlements impacted under the income test.

Other superannuation measures

In other superannuation measures, relatively less significant in terms of their impact to financial planning advice, the Government has:

• Extended the freeze on superannuation co-contribution threshold indexation for an additional year to 2012-13. This measure will mean that the co-contribution thresholds will remain at $31,920 and $61,920 respectively until 1 July 2013;
• Proposed a legislative amendment to remove a Self Managed Super Fund (SMSF) anomaly which exists in the superannuation legislation. This amendment will ensure that where the trustee of a SMSF is a body corporate, a parent or guardian may be a director of the body corporate in place of a member that is a minor. Currently, this is not possible unless the SMSF has an individual trustee structure;
• To fund a range of Stronger Super SMSF measures previously announced, the Government is proposing to increase the SMSF levy from $150 to $180 with effect from the 2010-11 income year, and introduce SMSF auditor registration fees from 1 July 2012; and
• Moved to ensure that gains or losses made by complying super funds on assets such as shares, units in a trust, and land, are subject to tax under capital gains tax rules. 

This is to ensure funds cannot treat these assets, (eg, shares) as “trading stock” so as to deduct losses on these assets against income rather than capital gains.

John Perri is technical services manager at AMP.