It was a budget that certainly delivered on news that the Government was tightening its belt to deliver a budget surplus for 2012-13 and superannuation was certainly not immune from this pain. Unfortunately though, as a result of the announced changes in tonight’s budget, we are likely to see confidence in the superannuation sector erode as the Government takes a narrow view to retirement savings policy for the sake of short-term popularity to endeavour to re-build public credibility of the Labor Party.
The measures about the additional contributions tax for individuals earning more than $300,000 made public a week ago started the bandwagon of criticism about a Government again using superannuation as a political football to kick a few financial goals. Unfortunately, the news delivered within the budget extended beyond this measure, sending a clear message about discouraging Australians to save for retirement.
So, here’s delivering the news:
30% contributions tax rate for individuals with income of more than $300,000
From 1 July 2012, individuals with income greater than $300,000 have a 30% tax rate apply on concessional contributions, rather than the 15% flat tax rate currently available.
The definition of “income” will be quite broad providing a greater catchment area of individuals subject to the higher contributions tax rate. This will include taxable income, concessional superannuation contributions (e.g. superannuation guarantee contributions and salary sacrificed contributions), adjusted fringe benefits, total net investment loss, target foreign income and tax-free government pensions and benefits, less child support.
There was some concern that an effective tax rate of 108% could apply where an individual breached the concessional and non-concessional contribution cap (calculated as 30% contributions tax + 31.5% ECT concessional contributions + 46.5% ECT non-concessional contributions). However, the Government has announced that the 30% tax rate will not apply to contributions that exceed the concessional cap. This effectively means that the highest marginal tax rate (46.5%) will still apply to excessive contributions.
It is unclear how the ATO will collect this additional contributions tax and what additional reporting will be required by super funds, in particular with tax-free benefit payments. If the super surcharge system was anything to go by, this could amount to another administrative disaster. Measures could apply to allow the ATO to collect this additional tax under the compulsory release authority that applies for non-concessional contributions.
Deferral on proposed extension of concessional contribution cap for over 50′s to 1 July 2014
With the transitional period for concessional contributions for those over 50 finishing at 30 June 2012, the Government back in May 2010 announced as part of their ‘fairer super’ package an extension of the concessional contribution cap where an individual’s super balance was less than $500,000. A deferral of the start date to 1 July 2014, is effectively an acknowledgement by Government that this policy decision is administratively difficult and that currently inadequate systems and reporting exists to appropriately manage the extension to the cap.
As a result of this deferral, all taxpayers, regardless of age, will be subject to a concessional contributions cap of $25,000 for the 2012-13 and 2013-14 income years (remembering that the Government in the Mid Year Economic & Fiscal Outlook; MYEFO) announced a freezing of indexation in 2013-14). When these measures are finally expected to commence in 2014-15, indexation of the concessional cap should occur to $30,000, meaning eligible individuals will be able to make concessional contributions up to $55,000 where 50 years of age an over.
Accordingly to Minister Shorten, deferring the start date to 1 July 2014 will allow implementation to occur in conjunction with changes to super fund reporting and systems that will be occurring under the SuperStream reforms. With the ATO developing an online reporting facility to manage member super balance, this deferral will allow for sufficient time to provide access to for member to comprehensive account balance information.
This changes are going to have a significant impact on individuals salary sacrificing into superannuation, in particular those with transition to retirement strategies.
SMSF Auditor Registration
The SMSF Approved Auditor role has been subject to significant reform as a result of recommendations from the Cooper Review to address issues of competency in the sector. Final details of the auditor registration along with the replacement rule for the accountant’s exemption are long overdue and have become a key source of frustration for the accounting industry.
The Government announced that it will provide $10.7m over 4 years to ASIC to develop and maintain an on-line registration system for auditors of self managed superannuation funds (SMSFs). As part of the registration process, ASIC will develop a competency exam for SMSF auditors. ASIC will also be responsible for the de-registration of non-compliant auditors. It is unclear whether the competency exam will apply to all approved auditors, or only to those who don’t meet minimum criteria such as number of funds audited each year?
Auditors may begin to register with ASIC from 31 January 2013.
In addition, a further $10.6m over 5 years (including $1.5m in capital funding in 2011-12) will be provided to the Tax Office to police registered auditors, check their compliance with competency standards set by ASIC and refer auditors to ASIC for enforcement action. The cost of this measure will be offset by increases in the SMSF levy and fees charged by ASIC for sitting the competency exam.
Still no word from Minister Shorten on the accountant’s exemption replacement.
We do need to overlay these budget announcements with some of the More Super measures to increase SGC from 9% to 12%, introducing a $500 credit for low-income workers and abolishing the age limit for SGC payments, which were applauded by the industry. However, many people looking to self-fund their retirement have been dealt a blow, and will challenge advisers as to the worth of individual’s building superannuation savings at the risk of the Government moving the goal posts again and again in the future.