[VIDEO] Superannuation and the 2013 Budget

Another year, another Budget. The good news is that no further changes to superannuation were made in last night’s Budget that hadn’t already been announced in April. In summary, the major upcoming announced changes to super are as follows:

  1. From 1 July 2014, earnings on assets supporting income streams above $100,000 per year will be taxed at a rate of 15%. This is in contrast to the current rules whereby all earnings from assets supporting superannuation income streams are tax-free. The tax only applies to earnings exceeding the $100,000 threshold, per individual member.
  2. The concessional contribution cap will be increased so that:
    a.      From 1 July 2013, taxpayers aged 60 and over will have a $35,000 cap; and
    b.      From 1 July 2014, taxpayers aged 50 and over will have a $35,000 cap

    This is in contrast to the current $25,000 limit that applies. For those of us under 50, we are expected to have the increased $35,000 cap by 1 July 2018.
  3. Changes to the Excess Contributions Tax Regime will allow taxpayers who have exceeded their concessional contribution cap after 1 July 2013 to withdraw the excess contribution from their superannuation fund, with the excess being taxed at the taxpayer’s marginal tax rate.

The last two points are fairly straightforward; however, the first point is a bit more interesting. We’ve provided a case study below to illustrate how it works.

Case Study A

Julia and Wayne have $1,600,000 in their super fund, split 75/25 ($1,200,000 and $400,000 respectively). They are both in pension phase, and follow the Rivkin recommendations.

a.      What happens in the event of a 5% return?

Earnings are $60,000 and $20,000 for each member. They are not affected by the new threshold and the earnings remain tax free.

b.      What happens in the event of a 10% return?

Earnings are $120,000 and $40,000 for each member respectively. As Julia’s earnings exceed $100,000, she is affected by the new rules and the tax applicable to her would be:

($120,000 - $100,000) x 15% = $3,000

This example highlights a couple of key points:

  •  A 10% rate of return means that you don’t have to have a super balance in excess of $2million to be affected by the new rules, as previously mentioned in the April announcement;
  •  A 10% rate of return can be quite achievable for a superannuation fund, particularly given that franking credits are included as part of taxable income;
  • Capital gains also form part of taxable income, meaning that you might be affected for a certain year. This particularly applies to those who have their own self-managed super fund, who might trade a Rivkin recommendation which generates a large capital gain, or sell property;
  • If you’re at or near the $100,000 threshold, some recommended Rivkin trades may no longer be suitable to you if the 15% tax will continue to apply – we have had a few trades in the past that particularly applied to funds in pension phase incurring 0% tax;

Capital losses

Currently, once a fund enters pension phase, capital losses are lost. This was previously due to the fact that since all earnings became tax free, the losses were not required. Going forward, will such losses be available to offset capital gains made while a fund is in pension mode? If there is some form of accumulation balance remaining in the super fund, capital losses are retained. However, as the law currently stands, if a fund is wholly in pension mode, capital losses are considered to have been lost.

‘Grandfathering’ for Assets Held

As mentioned, where a capital gain is generated, it will form part of the taxable income of the super fund. However, there will be provisions for assets already held in super funds. A summary of these ‘grandfathering’ provisions are as follows:

  • For assets purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024
  • For assets purchased between 5 April 2013 and 30 June 2014, you may choose for all of the capital gain to be affected, or for only the capital gain that accrues after 1 July 2014 to be affected
  • For assets purchased from 1 July 2014, all capital gains will be affected

These provisions mean that the asset value will have to be tracked in order to determine what part of the capital gain is taxable.

Going forward

These rules, if implemented, will increase the complexity of the management and administration of all superannuation funds, including self-managed. Members realising capital gains may be caught, and it may eventually see a movement of assets away from super in order to become more tax efficient. This would be contradictory to the whole point of superannuation, saving for retirement and encouraging people to not rely on the age pension.

For more information on how Rivkin Super can help you with your SMSF, click here. 

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