Newsletter No. 6, June 2012

The May 2012 Budget

(1) Concessional contributions cap reduced to $25,000 for people aged 50 or over

The concessional contributions cap for people aged 50 or over is currently $50,000.  The $50,000 limit will end 30 June 2012 as it will be reduced to $25,000 from 1 July 2012.  This means, everyone will be subject to the general cap of $25,000 regardless of their age.

The Government was planning to keep the $50,000 limit for people aged 50 or over with a superannuation account balance of less than $500,000.  However, in consultations, on the implementation of this special treatment, the superannuation industry raised concerns in relation to the cost and complexity involved in administering the balance limit, and the difficulty some individuals may face in determining whether they are eligible for the higher cap of $50,000.

Therefore, the Government has decided to defer this special treatment until 1 July 2014.   This is so the Government can implement changes to superannuation fund reporting and systems, as well as for the Tax Office to develop an online reporting facility that will provide access to comprehensive account balance information.

Please keep in mind that the Government has made no concrete promise on whether this special treatment will definitely be enacted in 2014.

(2) An extra 15% tax on concessional contributions for people earning $300,000 or more.

From 1 July 2012, people earning more than $300,000 a year will have to pay an extra 15% tax on their concessional contributions.  This means, the total tax that would be charged on their superannuation concessional contributions will be 30% instead of the current 15%.

If a person’s income, excluding their concessional contribution, comes to less than $300,000 and their super contributions pushes them above the threshold, the 30% tax will apply only to the excess above $300,000.

For example, a person with an income of $285,000 and concessional contributions of $20,000 would have earnings of $305,000 (i.e. $285,000 + $20,000 = $305,000).  The 30% tax rate will only apply to $5,000 of their concessional contributions ($305,000 – $300,000 = $5,000).

At this stage, the Government proposed that the definition of “income” for the purpose of this new measure will include taxable income, concessional superannuation contributions, adjusted fringe benefits, total net capital losses on investments such as shares and property, any overseas income exempt from tax, plus any tax exempt government pensions and benefits, less child support.  This definition also includes any notional contributions for members of defined benefit funds.  However, it does not appear to include tax-free income from superannuation pensions, such as transition to retirement pensions.

As this new law has not yet been written, it is not known at this stage what will definitely be included in the definition of “income”.

If a person has exceeded their concessional contributions cap (i.e. $25,000), the 30% tax will not apply to the excess concessional contributions as the excess amount will be taxed at the top marginal tax rate (i.e. 45%).

Why is this new law proposed?

It has been proposed because the Government wants to make the superannuation system fairer for everyone.  High income earners are currently receiving the same contribution tax treatment as everyone else.  That is, the current 15% contribution tax provides high income earners with a significantly larger tax concession than those on lower marginal tax rates when they put extra cash into their superannuation fund.

It is expected that only a small number of people (approximately 128,000) will be affected.

Monica Rule is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Fund”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Monica Rule