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
Concessional contributions include
Clearly, the latest batch of Labor ministers don’t have a political memory. The
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
- adjusted fringe benefits
- total net
- 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
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%
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 |
Instead of tinkering with the super tax rates again…why didnt they just add another salary level on total taxable income.?
ie:
Total assesable income Tax Rate
180,000 to 300,000 = 45%
300,001 + = = 46%
Would have had the same effect but would have cost $0 to implement.
Hi, how is any employer super contribution over the $25k concessional amount taxed? Is it at the persons top marginal rate or some other rate? I am paid about $27k in super, what happens to the extra $2k?
Another factor that has not been mentioned is ‘bracket creep’. This government is setting fixed levels at which lower income support ends and higher taxation or levies etc start. With inflation running at about 3% per year, and likely to be higher when the carbon tax sets in, the tax revenues will just keep on growing as middle income earners become the new ‘rich’.
Hi Trish, any idea on how this will impact on DB funds? Are we going back to the dark days of ‘notional contributions’, which as you know would require a Fund’s actuary to spend countless hours on calculating?
Our fund has a generous accrual rate, yet no complusory member contributions…..for salary packaging purposes, we use a rate of 10.8% to calculate the cost of super…..I’m sure the actuary will need to look at the age etc of each individual member to calculate it……good grief!!!!
Hi Trish,
An important aspect of this announcement was that the government would consult with industry concerning implementation. No-one seems to be debating the Revenue grab, so I’ll assume that the issue is only on the administrative aspects. At the risk of oversimplifying can I suggest that there doesn’t really need to be a surcharge or any negative impact on the super industry. If these contributions were made to be taxable/rebatable in the hands of the individual the whole assessment process could be handled by the ATO. They have the information via PAYG summaries, MCS reports and tax returns. By raising the assessment against the individual the super industry is not impacted. The final step in the process is to provide a voluntary release authority which would mean that they could choose to pay from their own resources or from their fund balances (or some combination). Funds are already handling release authorities so there’s no new administration required. And if the person is a defined benefits member, most such funds that I am aware of have already solved that issue during the Surcharge days by adjusting final benefits against any outstanding “debt” at the time the benefits commence to be paid. That “debt” can even be “paid” via contributions. So while I agree that reintroducing Surcharge would be a retrograde step there are efficient options which should not impact the wider superannuation community.
Hi Peter
Many thanks for your contribution to the discussion.
Based on the shocking administration and consequences of the excess contributions tax regime and the unwillingness of the Government to review the flaws of the ECT regime, I have little confidence that the surcharge will be administered in a fair or sensible way, but fingers crossed it is a smooth implementation.
There were much easier ways to target those earning $300,000 or more, rather than tinkering with the super system yet again. Like many observing this budget I do believe they are opening the door to an increase in tax at lower levels of income at a later date.
Regards
Trish
Whilst I agree that something ep eeded to be done to even up the tax benefits for those earning more cf those earning less with regard to super, I don’t necessarily agree that this is the easiest/best way, by making the super fund pay the tax. It might be easier to impose the tax on the taxpayer – this would be much easier to do, and could be done when the tax return is lodged – the ATO can alrady crossmatch super fund returns to individual tax returns.
Also, the Govt has not addressed many of the lurks in the SMSF environment which only those with higher balances bother to take advantage of eg self-insurance which generates a notional tax deduction for no actual cash outlay, use of reserves to allow funds to not be part of a member’s account, anti-detriment provisions, which provide tax dedutions even if the funds have been withdrawn and recontributed (so are no longer taxable), loose definitons of financial dependancy and no adequate checks on who receives benefits esp from SMSFs. This is just some of the areas that could be tightened up so super is used for retirement benefits and not intergenerational wealth transfer.
Regards
Jenni
thanks Trish the specific examples are helpful though maybe it could also be pointed out that people contemplating such action would / should investigate the consequences of such disposals on their retirement situation. Another point is that those taxpayers in the $300,000 income range are using / should be using experienced tax agents / advisers to manage their financial situation tax effectively and they would be doing the calculations and providing the advice. Tax agent fees are tax deductible so I wouldn’t be too concerned about the ‘poor’ individuals who earn $300,000 +. If you earn the income why shouldn’t you pay the tax? Re the website and your books on super I have found these particularly useful keep up the good work.
Hi Trish, I am a 58 year old semi retired single woman. I made decisions in my 30′s to to invest in property rather than super after witnessing the constant ‘fiddling’ of super by federal governments.
Lo and behold some 20 years later and after many years of fiscal discipline I am faced yet again with the enormous difficulties of trying to plan a financially self sufficient future.
The very same ‘fiddling’ causes retirement financial planning to be very difficult. My Financial Plan of 2010 now fairly useless!
The concessional contribution debacle most annoying!! Baby boomers continue to pay the price (and of course reap the benefits of real estate capital gain too!).
could you please explain how low and middle income earners retiring (in the financial year they are retiring) and investors selling assets (in the year they sell) will incur the 30% surcharge. what are the assumptions underlying this statement.
Hi Mary
The income test for the higher contributions tax is based on taxable income, so if someone sells an investment property, half of the capital gains from the sale form part of taxable income, and depending on the capital gain, this windfall amount can lift an individual into the super surcharge territory.
Also, when an individual receives a retirement payout (if under 60), the payout forms part of a person’s assessable income/taxable income, but they receive a tax offset for that payout. The Government has not made it clear how they will treat these types of payments. In 1996, when the previous surcharge was in place, it turned into a total debacle with new retirees being faced with surcharge bills in the year they retired because theit taxable income jumped for that single year. They did modify the rules eventually but only after a lot of angst and lobbying, and expensive financial advice.
Note that much of the detail has not been released yet, but based on what I understand, these are some of the implications.
Regards
Trish
The income definition includes 7 items which, except for those with a single income source will be almost impossible to calculate until after the end of the financial years. Perhaps this is the intent. Make it so hard that one does not make extra super contributions and hence pays the higher marginal rates, or just makes the extra contributions and pays the surcharge. Either way the government wins.
Chris & Martin
You state that most superannuants earning over $300,000 will have self managed funds. Whether or not this is true is irrelevant. ALL super funds will need to devise, implement, have systems in place to administer the tax as well as staff able to provide general information on the topic – as Trish points out – for a minority of members. I’ll reserve my judgement on how costly the measure will be until the finer details are announced however it would be very naive to think that it won’t be costly to ALL super fund members.
Hi Helen and to all readers making comments on this post
In relation to SMSFs, according to the ATO, nearly three-quarters (72.2%) of SMSF trustees have a taxable income of less than $80,000 a year although this statistic is likely to be distorted by the fact that SMSF trustees receiving payments from SMSF pensions are not required to include this pension income in personal tax returns. Sixty per cent of SMSF trustees earn less than $60,000 a year, while just under half (46.6%) of all SMSF trustees have a taxable income of $40,000 or less. Around 20% of SMSF trustees earn $100,000 or more.
Although SMSFs will be affected, it appears that it will be most costly for large super funds and they will need to spread the costs across all fund members.
Regards
Trish
The fact is it is inequitable for people on very high incomes to receive tax breaks on saving. It would be preferable for the federal government to go back to a better-funded pension given the billions it spends every year on granting concessions to those who don’t need them.
The superannuation industry has had its snout in the trough for too long and a crackdown on perks for the rich is well overdue.
I agree about the administration costs. For most people these are hidden. As a former business owner, I know how time-consuming and costly it can be when the government introduces any kind of change to payroll or superannuation. But the main problem was trying to get staff to see superannuation as anything but an enforced lock-up of their money, and even worse one in which the government could dip their hand at any time through legislative changes. Many of them did not even consider it ‘their’ money. Until the government stops constantly making changes such as the proposed new surcharge, it is going to be impossible for people to have confidence in it as a stable vehicle with which to secure a comfortable retirement.
Hi Nancy
Thanks for your comments. Yes, I agree with you that this constant tinkering with the super rules affects people’s confidence in super as a retirement vehicle.
Regards
Trish
This would be funny if it weren’t so tragic. Surcharge mark 2 immediately brings that Einstein quote about insanity to mind. It seems the pollies think that doing something again will bring about a different result.
As someone who works for a super fund, this is terribly depressing. Surcharge 1 may have been abolished years ago, but it lives with us still – especially for defined benefit funds.
Hi Barry
Thanks for your comments. I agree with you that this proposed change is terribly depressing.
Regards
Trish
i have never found independent advice
they all tell u spin to suit themselves
I don’t agree with the emphasis of this article. You don’t appear to include SMSF members in your article. Your emotional wording does you no credit. The fact is the community needs to raise more revenue to pay for infrastructure and the costs of an older population. The government has put in place a mining tax to help with these costs and this budget measure is a further step towards a progressive taxation system. Those who earn more should pay more tax if we are to have an equitable system.
You would be the first to complain about poor services provided by governments of all persuasions. One reason is the drive by private enterprise advocates who appear to believe that the only thing governments should do is levy the lowest taxes on well off people.
Hi Chris
Thanks for your comments. The Government has stated the reason for the increase in contributions tax for high-income earners is an equity issue, rather than a budgetary issue. The equity basis for the increase in tax doesn’t stack up, although they have politicised this change to score some points when it is clearly a budgetary issue.
In my view, it is bad policy to target high-income earners through this mechanism because the tax hits all fund members via increased administration costs. We endured this before when the super surcharge was introduced in 1996, and it was a debacle. Yes, it sounds good, but if it is implemented in a similar way to the surcharge it will be a tax on everyone. There are many other ways high-income earners can be targeted rather than via a compulsory super system.
In response to whether I would be the first to complain about poor services… maybe not the first, but perhaps the second
Regards
Trish
Trish,
You have not responded to the main point raised by Chris. Given the significant increase in SMSFs, the circumstances have changed since 1996. Many of the people affected by this change will have SMSFs and I do not see how increased tax on contributions to an SMSF adversely impacts upon anyone other than the members of that particular SMSF.
As I understand the proposal, it is not a surcharge, but rather still tax. This is simpler to administer for the funds as there is only the one calculation required.
Regards
Martin Brown
I’m not sure I follow the logic that, just because a lot of wealthy individuals have SMSFs, this surcharge should be simple to administer. It may be for the SMSFs, but by following that logic, it would seem that every non-SMSF has to change their IT systems and procedures (at not-inconsiderable cost) to administer this surcharge that will affect very few of their members.
The argument that the wealthy should pay more tax doesn’t have to be related to super – they’ve already imposed very low contribution caps for that (or so they tell us that was the reason). If you want the wealthy to pay more, why couldn’t they impose a higher marginal income tax rate for those who earn over $300k and leave super out of it? I’m sure there are many ways that the wealthy can reduce the tax they pay – targeting super seems to be the easy option but happens to affect everyone else at the same time.