Changes to Super

From all of us at Chris Humphrey Private Wealth Management we wish you a happy, safe and joyous holiday season.

This month’s wealth pipeline was intended to continue our discussion on mitigating sequencing risk.  However, due to the recent mid-year budget announcement by the Government, our discussion on mitigating sequencing risk will resume next month.  This wealth pipeline focuses on the superannuation aspects of the mid-year budget.

Changes to Super

The previous Labor government proposed various laws and legislation that directly related to the operation of superannuation.  However, these laws were never passed prior to the Federal Election.  The new Coalition government has recently completed a review of over ninety superannuation and taxation changes.  We outline some of the more important policy decisions that the Government has adopted resulting from their review.    

SMSF Changes - at a glance

One measure that the Government intends to implement concern the administrative directions and ATO penalties with regard to SMSFs.  The Government’s policy will grant the ATO more flexibility and cost-effective penalty options to deal with/ regulate SMSFs that breach the current superannuation laws.

Another measure adopted by the government involves the penalising of persons/ members who ‘promote illegal early release schemes’, essentially this measure introduces penalties for promoting schemes designed to obtain the illegal release of superannuation benefits.  This is where superannuation benefits are withdrawn from a member’s SMSF for reasons that do not qualify with the ATO’s predisposed conditions of early release (i.e. terminal illness or permanent incapacity). 

Tax on Pension Earnings

On the 6^th of November 2013, the Government announced that they would not be proceeding with the tax on pension earnings announced by the former Labor Government on the 5^th of April 2013.  If this measure is implemented (subject to certain transitional rules), it would have taxed people’s superannuation pension earnings above $100,000 in the draw- down phase.  The complexity and compliance costs associated with this measure were extreme and, according to the Government, this measure was essentially undeliverable.

Deeming of account based pension

Currently, pension payments received from an account-based pension are treated more favourably in Centrelink’s income test calculation, than income generated by other financial investments such as money in a bank account.  This is because income payments from an account-based pension attract a non-assessable portion, which generally recognises that a part of these payments represents a return of capital. 

Legislation has recently been introduced into parliament which, if passed, will extend the normal deeming rules which apply to other financial assets to account-based pensions from the 1^st of January 2015.  Importantly, some account-based pensions commenced prior to the 1^st of January 2015, will be grandfathered, that is for Centrelink income test purposes will continue to be assessed under the current more favourable income test approach.    

For grandfathering to apply, the account-based pension must have been commenced prior to the 1^st of January 2015, and the receipt of the account-based pension must have also been in receipt of Centrelink income support immediately before the 1^st of January 2015.

Increase in the Super Guarantee Rate

The gradual increase of the Super Guarantee to 12% will go ahead, but legislation was recently introduced which, if passed, will delay this increase by two years.  It is proposed that the current rate of 9.25% will continue to apply until the 30^th of June 2016 and will subsequently gradually increase to 12% by the 1^st of July 2021.

Low Income Super Contributions

Legislation has recently been introduced which, if passed, will repel the Low Income Super Contributions (LISC).  Only during the 2012/2013 financial year, individuals earning $37,000 or less per year may be eligible for the LISC of up to $500 for the year.  It is proposed that the LISC will no longer be available from the 1^st of July 2013 onwards.