Note: SuperGuide will be updating this article regularly as new information becomes available on what this new superannuation surcharge means for those directly affected, and how the costs of administering the super surcharge will be spread across all super fund members. Article last updated on 9 May 2012.
In the May 2012 Federal Budget, the Government has announced that from 1 July 2012, anyone earning more than $300,000 will pay 30% tax on concessional contributions paid into a super fund, doubling the super tax bill for high-income earners. The current contributions tax is a flat rate of 15%.
Concessional contributions include Superannuation Guarantee (SG) contributions, salary sacrifice contributions and tax-deductible super contributions. If you’re a member of a defined benefit fund (funded or unfunded schemes), then ‘concessional contributions’ for the purpose of the super contributions surcharge will include all of your notional employer contributions.
Clearly, the latest batch of Labor ministers don’t have a political memory. The Liberal party introduced a similar tax in 1996, and it ended up costing all super fund members via a massive hike in administrative costs. The shocking debacle, when introduced by the Liberal party, cost the super industry and fund members as much money to administer the super surcharge, as the government collected in extra super taxes.
In effect, by repeating this political mistake, the government will be taxing the rich, and robbing the ‘poor’! I will explain how this super surcharge will hit all super fund members later in the article.
How will the super contributions surcharge work?
The big question is, how will the Federal Government measure a person’s income to determine if the person earns more than $300,000 a year? According to the Government, the definition of ‘income’ for the purpose of this measure will include:
- taxable income
- concessional superannuation contributions
- adjusted fringe benefits
- total net investment loss
- target foreign income
- tax-free government pensions and benefits
- BUT less child support.
Prior to the 2012 Federal Budget, there were rumours that tax-free private pension income would also be included in the definition of income for the purposes of this new superannuation contributions surcharge. Based on the latest information from the Government, tax-free private pension income is not included.
Note: According to the Federal Government, “if an individual’s income excluding their concessional contributions is less than the $300,000 threshold, but the inclusion of their concessional contributions pushes them over the threshold, the reduced tax concession will only apply to the part of the contributions that are in excess of the threshold.” The Government provides an example of how this adjustment would work for a taxpayer who finds themself in this position: If a person has income of $285,000 but also has concessional contributions of $20,000, this takes total income to $305,000. The super contributions surcharge of 30% would only apply to $5,000 of the person’s super contributions.
Other key facts about the new super contributions surcharge include:
- Ironically, the Federal Government ministers realise the insanity of combining the current excess contributions tax scheme with a super surcharge by promising that the super surcharge will not apply to concessional contributions which exceed the concessional contributions cap (and are subject to the excess contributions tax). The Government had to publicly state this exception because we could have had the situation where compulsory superannuation contributions were taxed at 108% – not a good look!
- The 15% superannuation contributions surcharge (taking the contributions tax rate to 30% for high-income earners) does not affect the 15% earnings tax on super fund earnings, or the tax exemption on fund assets financing retirement pensions.
Everyone ends up paying the super surcharge
Despite the media spin, those on $300,000-plus salaries are not the only ones who will be hit by the super surcharge. Other taxpayers who will be hit with the 30% tax on super contributions include:
- low-income earning and middle-income earning individuals retiring (in the financial year they retire)
- investors selling assets such as properties or shares (in the year they sell)
- other individuals who receive lumpy income (such as women who have re-entered the workforce and trying to catch up on earnings after time out of the workforce, and small business people)
- administrative nightmare for all super funds trying to introduce software systems to track and collect the extra tax for a minority of members. The super funds will pass on these costs to all super fund members.
The tax impact for those affected is set out in the table below.
Note: The Department of Treasury intends to consult with the superannuation industry on further design and implementation details. We will update this article when further information becomes available.
|Extra super tax for $300,000-plus income-earners|
|Super contributions||15% contributions tax||30% contributions tax||Extra tax|
|Maximum employer is required to contribute as SG (approx.)||$15,000||$2,250||$4,500||$2,250|
|Concessional contributions cap for 2012/2013 and 2013/2014 years||$25,000||$3,750||$7,500||$3,750|