Key superannuation changes

The Government has recently enacted a number of key changes to superannuation.

Excess concessional contributions

The Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Bill 2013 and the Superannuation (Excess Concessional Contributions Charge) Bill 2013 received Royal Assent on 29 June 2013 as Act Nos 118 and 116, respectively. They were introduced in the House of Representatives on 19 June 2013 and passed all stages without amendment.

Broadly, the Bills amended the ITAA 1997 and the TAA to establish a new excess concessional contributions tax system from 1 July 2013. The Government believes this is fairer for individuals who exceed their annual concessional cap.

The new rules seek to ensure that individuals who make excess concessional contributions are taxed on the contributions at their marginal tax rates, rather than an effective 46.5% tax applying to all taxpayers. Under the changes, excess concessional contributions tax no longer applies from 1 July 2013. Instead, a new Div 291 of the ITAA 1997 provides that excess concessional contributions are automatically included in an individual's assessable income, and subject to an interest charge to account for the deferral of tax. The charge (equal to the shortfall interest charge) is payable on the increase in the individual's tax liability that arises as a result of having excess concessional contributions for the relevant financial year. Notably, there is no discretion for the Commissioner to remit the charge.

Prior to these changes, concessional contributions in excess of the annual cap were effectively taxed at the top marginal tax rate of 46.5%. This was because concessional contributions in excess of the annual concessional cap were subject to excess contributions tax at the rate of 31.5%, plus the 15% contributions tax paid by the fund. Further, excess concessional contributions counted towards the taxpayer's non-concessional cap. The concessional cap is generally $25,000 (or $35,000 in 2013–2014 for those aged 59 years or over on 30 June 2013: see below). "Concessional contributions" include all employer contributions (such as superannuation guarantee and salary-sacrifice contributions) and personal contributions for which a deduction has been claimed.

The then Minister for Superannuation and Financial Services, Bill Shorten, said the effective tax rate of 46.5% for excess concessional contributions was a severe penalty for individuals below the top marginal tax rate. In contrast, individuals on the top marginal rate effectively faced no penalty and benefited from being able to defer the timing of their taxation. Mr Shorten said the amendments in the Bills were designed to ensure that individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages and had chosen to make a non-concessional contribution. The Government expects that the reform will reduce the tax liability of around 40,000 people in 2013–2014, by an average amount of $1,100.

It is important to note that this new regime for concessional contributions will not apply to excess non-concessional contributions, which will continue to be hit with 46.5% tax.

Date of effect

The amendments apply in the 2013–2014 income year (and corresponding financial year) and later income years (ie to concessional super contributions made on and after 1 July 2013).

Sources: Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Bill 2013, www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5106;

Superannuation (Excess Concessional Contributions Charge) Bill 2013, www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5105;

Minister for Superannuation and Financial Services media release No 050, 19 June 2013, www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2013/050.htm&pageID=003&min=brs&Year=&DocType=.

Other key changes

The Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 received Royal Assent on 28 June 2013 as Act No 82 of 2013. It was introduced into the House of Representatives on 15 May 2013 and passed all stages without amendment. It introduced a higher concessional contributions cap of $35,000 for older Australians and an extra 15% contributions tax for very high income earners (see below for details).

The Bill also implemented a range of technical amendments that apply from 2012–2013 to improve the operation of the low income superannuation contributions (LISC) regime for those with adjusted taxable incomes below $37,000.

Higher contributions cap of $35,000

The Bill amended the Income Tax (Transitional Provisions) Act 1997 (TPA) to implement a higher concessional contributions cap for certain persons. Instead of the general concessional cap of $25,000, a cap of $35,000 will apply for people aged 60 years or over from 1 July 2013 (see below regarding further details of the exact eligibility age). From 1 July 2014, this increased cap will apply for people aged 50 to 59 years (also see below). The higher concessional cap is temporary and will cease to apply when the general cap reaches $35,000 through indexation (which is expected to be 1 July 2018; notably, the general cap is expected to rise to $30,000 through indexation from 2014–2015). The higher concessional cap will not affect the non-concessional contributions cap, which remains at six times the general concessional cap of $25,000 for all individuals, regardless of age.

Eligible age for higher cap

Previously, eligibility for the higher concessional cap that existed up to the 2011–2012 financial year applied where the individual reached 50 years of age in the relevant financial year (ie eligibility was based on an individual's age as at 30 June in the relevant financial year). However, if an individual died before their 50th birthday, they did not qualify for the higher cap and their estate could have been issued with an excess contributions tax assessment, which would not have been the case had they reached 50 years.

Accordingly, the new rules determine eligibility for the higher cap that applies from 1 July 2013 by reference to an individual's age as at 30 June in the year preceding the relevant financial year in which the higher cap applies. That is, the $35,000 concessional cap for 2013–2014 applies to taxpayers who were aged 59 years or over on 30 June 2013. Similarly, from 2014–2015 the $35,000 cap will apply to taxpayers who are aged 49 years or over on 30 June of the previous financial year: new s 292-20 of the TPA.

Example: Victoria's birthday is 12 May 1954 and she is aged 59 years on 30 June 2013. For the 2013–2014 financial year, Victoria's concessional contributions cap will be $35,000 instead of the general $25,000 cap (but her non-concessional contributions cap remains at $150,000).

Date of effect

The higher cap applies from the 2013–2014 financial year for taxpayers who were aged 59 years or over on 30 June 2013 (or from 2014–2015 for taxpayers who will be aged 49 years or over on 30 June 2014).

Extra 15% contributions tax for $300,000+ incomes

The Bill also gave effect to the Government's 2012–2013 Budget measure to double the effective contributions tax from 15% to 30% from 1 July 2012 for concessional contributions made on behalf of individuals with incomes greater than $300,000. Additionally, the Superannuation (Sustaining the Contribution Concession) Imposition Bill 2013, which received Royal Assent on 28 June 2013 as Act No 87 of 2013, establishes the mechanism by which the additional 15% tax is payable on a person's taxable contributions (ie under new s 293-15 of the ITAA 1997). The Bill was introduced into the House of Representatives on 15 May 2013 and passed all stages without amendment.

Without the amendments, the 15% tax on concessional contributions (paid by the receiving superannuation fund) provides high income earners with a larger tax concession than those on lower marginal tax rates. However, despite the extra 15% tax on contributions for individuals with incomes above $300,000, there will still be an effective tax concession of 15% (ie the top marginal rate less 30%) on their concessional contributions up to the cap of $25,000 (or, from 2013–2014, $35,000 for older individuals: see above).

Division 293 tax

Specifically, the Bill inserted a new Div 293 into the ITAA 1997 to apply an additional 15% of "Div 293 tax" on "taxable contributions" for taxpayers above the "high income threshold" of $300,000 in relation to affected contributions from 1 July 2012. That is, the effective contributions tax is doubled from 15% to 30% for concessional contributions (up to the cap of $25,000, or $35,000 if applicable) made on behalf of individuals who are above the $300,000 income threshold, thereby effectively reducing the tax concession on such contributions from 30% to 15%.

$300,000 high income threshold

From 2012–2013, the extra 15% tax under new Div 293 is payable by individuals whose combined "income for surcharge purposes" (less reportable superannuation contributions, to avoid double counting) and "low tax contributions" (ie concessional contributions up to the cap of $25,000, or $35,000 if applicable) exceed $300,000 for an income year: new s 293-20 of the ITAA 1997. In this case, a taxpayer will have "taxable contributions" that are subject to an extra 15% of Div 293 tax. However, the amount of taxable contributions is restricted to the lesser of the low tax contributions and the amount of excess over $300,000.

A taxpayer's "low tax contributions" is essentially his or her "concessional contributions" (as modified by the special rules for certain defined benefit interests: see below), less any excess concessional contributions for the year: new ss 293-25 and 293-30. Importantly, this means that the extra 15% contributions tax does not apply to concessional contributions that exceed a taxpayer's concessional contributions cap (whether $25,000 or $35,000). Such excess concessional contributions are, in any event, already effectively taxed at the individual's top marginal tax rate.

An amount of excess concessional contributions that is refunded under s 292-467 is included for the purposes of the $300,000 threshold (despite being excluded from low tax contributions) as it is included as "income for surcharge purposes". However, excess concessional contributions disregarded on under s 292-465 (due to special circumstances) are low tax contributions and therefore counted for the purposes of the $300,000 threshold.

The Government has adopted the definition of "income for surcharge purposes" for the purposes of the high income threshold test to prevent individuals from attempting to manipulate their taxable income (eg via salary-packaging arrangements or negative gearing) so as to reduce or avoid the extra Div 293 tax. "Income for surcharge purposes" is used to determine whether an individual is liable for the Medicare levy surcharge. It is defined in s 995-1 of the ITAA 1997 to include:

• taxable income (after adding back any amount that was exempt because family trust distribution tax was paid in relation to it);

• total reportable fringe benefits (if any);

• reportable superannuation contributions;

• total net investment losses (ie both net financial investment losses and net rental property losses);

• less any superannuation lump sum amounts for the income year for which the taxpayer is entitled to a tax offset.

The tax payable is 15% of the amount of the low tax contributions that exceed the $300,000 threshold. That is, if an individual's income (excluding their concessional contributions) is less than the $300,000 income threshold, but the inclusion of their concessional contributions pushes them over the threshold, the increased tax rate only applies to the part of the contributions that are in excess of the high income threshold. If a taxpayer does not have low tax contributions, there is no liability for the extra Div 293 tax.

Example: Sabina's income (income for surcharge purposes other than reportable superannuation contributions) is $285,000 for an income year and her low tax contributions are $25,000 for the corresponding financial year. Sabina's combined income and low tax contributions are $310,000, being $285,000 (income for surcharge purposes other than reportable superannuation contributions) plus $25,000 (low tax contributions). The amount of low tax contributions ($25,000) is greater than the amount by which combined income and low tax contributions exceed the $300,000 threshold (being $10,000, or $310,000 less $300,000). Hence, Sabina's taxable contributions are $10,000 and the extra Div 293 tax payable is $1,500 (ie 15% of $10,000).

Special rules for defined benefit interests, judges etc

The Bill introduced special rules to apply the additional 15% tax to higher-level state office holders with incomes above the $300,000 threshold who have defined benefit interests and salary-packaged contributions in respect of constitutionally protected funds.

However, an exemption applies to certain Commonwealth justices and judges in respect of contributions for a defined benefit interest in a superannuation fund under the Judges' Pensions Act 1968, and temporary residents who depart Australia. These complex special rules in new Subdivs 293-D to 293-G of the ITAA 1997 modify the rules for these individuals.

Date of effect

The amendments apply in relation to affected contributions from the 2012–2013 income year.

Sources: Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013, www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5035;

Superannuation (Sustaining the Contribution Concession) Imposition Bill 2013, www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5034.