- Conduct a financial systems inquiry
- Retain tax-free super for over-60s, for the moment
- Delay Superannuation Guarantee increase for 2 years
- Reverse the Low Income Super Contribution (LISC)
- Cancellation of proposed tax on pension earnings above $100,000 a year
- Introduction of PLP includes payment of SG contributions, and diluted franking credits
- Major review of excess contribution penalties, including those on non-concessional contributions
- Increase concessional caps, and co-contribution payments, when Budget permits
- Tacit support for double tax on concessional contributions for high-income earners
- Review minimum pension payment rules for account-based pensions
- Regularly index the Commonwealth Seniors Health Card
- Legislation introduced for extending Age Pension deeming rates to new super pensions
- Improve governance of superannuation industry by requiring more independent directors
- Improve reporting standards for super funds
- Transfer small business clearing house for SG to ATO, rather than DHS
- Actively encourage alternative retirement income stream products
- Military super to be indexed in the same way as the Age Pension
- Hinted at reducing ATO supervisory levy for SMSFs
The Liberal Party and National Party Coalition are now in government and the superannuation agenda has shifted slightly, although the LNP has not yet confirmed all of its pre-election superannuation policies. Outlined below is a quick recap of the LNP’s position on current and proposed superannuation policies.
Before the September 2013, federal election I wrote that the Coalition seemed to be struggling with the concept of superannuation. The Coalition has lost a lot of their super knowledge over recent years with the retirement of many senior MPs, including Peter Costello, who was the architect of the 2007 changes that brought in tax-free super for over-60s, introduced caps on non-concessional contributions, reduced the caps on concessional contributions, and removed limits on the amount of super that you could withdraw at concessional rates.
The federal politicians responsible for superannuation policy are the federal treasurer, Joe Hockey and the assistant treasurer, Arthur Sinodinos. Previously, Senator Sinodinos has worked closely with former prime minister, John Howard as the PM’s chief of staff, and in 2006 Sinodinos moved into the private financial services sector. Recently, Senator Sinodinos disclosed that he wanted to level the playing field in super, indicating that SMSFs had too many advantages. The newly elected prime minister, Tony Abbott, dismissed the senator’s comments about SMSFs, while confirming his government’s promise that there would be no unexpected adverse changes to superannuation in the government’s first term.
The headline policy from the Coalition is that it has promised not to make any ‘unexpected detrimental changes’ to super, although that is not the same message as saying that it will not make any detrimental changes to super. Two of the major policy announcements by the Coalition relate to what I believe are very negative announcements: delaying the Superannuation Guarantee increase, and reversing the Low Income Super Contribution (LISC) (more on these policy reversals later in the article).
The LNP federal government has promised the following superannuation policies:
- Conduct a financial system inquiry. On 21 November 2013, the Coalition government released the draft terms of reference for the inquiry, and appointed David Murray as chair (see later in article for more details).
- Retain tax-free super for over-60s, for the moment
- Delay Superannuation Guarantee increase for 2 years. On 24 October 2013, draft legislation was released (see later in article for more details).
- Reverse the Low Income Super Contribution (since it was funded by the Mineral Resource Rent Tax, which is to be abolished). On 24 October 2013, draft legislation was released (see later in article).
- Tax on pension earnings above $100,000. On 6 November 2013, confirmed that the proposed tax on pension earnings above $100,000 a year would NOT become law
- Introduction of parental leave policy includes payment of Superannuation Guarantee contributions, and diluted franking credits
- Excess contributions. Major review of excess contribution penalties, including those on non-concessional contributions
- Concessional caps and co-contributions. Increase concessional caps, and co-contribution payments, when Budget permits
- Retain double tax on contributions. Tacit support for double tax on concessional contributions for high-income earners
- Minimum pension payments. Review minimum pension rules for account-based pensions
- CSHC. Regularly index the Commonwealth Seniors Health Card
- Age Pension deeming rates. The Coalition has introduced legislation into parliament extending Age Pension deeming rates to new super pensions (taking effect from 1 January 2015)
- More independent directors. Improve governance of superannuation industry by requiring more independent directors on super fund boards and disclosing conflicts of interest
- Raise reporting standards. Improve reporting standards to ensure all super funds disclose fees, investment returns and asset classes using the same definitions
- Small Business Clearing House. Transfer the Small Business Clearing House to the ATO, rather than via the Department of Human Services
- Promote annuities. Actively encourage alternative retirement income stream products (presumably referring to guaranteed income-style products)
- Military super. Military super benefits to be indexed in the same way as the Age Pension
- ATO SMSF levy. Hinted at reducing the ATO supervisory levy for SMSFs (but I doubt it)
- Abolish Super Charter and Council of Superannuation Custodians. This decision was only announced in November 2013 (for more information about the Super Charter and Council see SuperGuide article Liberals axe Super Charter and Council of Custodians).
Conduct a financial systems inquiry
The LNP federal government plans to conduct a financial systems inquiry, including an examination of the superannuation system. On 21 November 2013, the Coalition government released the draft terms of reference for the inquiry, and the yet-to-be-appointed committee (apart from Chair David Murray) will submit a report in late 2014 (see SuperGuide article Financial System Inquiry Terms of Reference now available).
Retain tax-free super for over-60s, for the moment
The LNP is silent on whether they intend to retain tax-free super for over-60s but what the Coalition has said is: “We will ensure that no more negative unexpected changes occur to the superannuation system so that those planning for their retirement can face the future with a higher degree of predictability.” I am not really sure what this statement means, but I am guessing that they mean if they do eventually tax super benefits, or any other ‘negative’ type of super policies, that they will give lots of notice. For example, they have given 12 months’ notice that they intend to freeze the SG increase for 2 years if they win the election (see text later in the article).
Delay Superannuation Guarantee increase for 2 years
Effective from 1 July 2013, the ALP federal government increased Superannuation Guarantee contributions from 9% to 9.25%, and has legislated that SG contributions will progressively increase 12% by 2019. The Coalition was initially against this SG increase but they have now promised not to rescind the policy. The LNP will freeze the SG increases for 2 years, which means that the SG rate will remain at 9.25% until June 2016 (see SuperGuide article Liberals set to slow down SG increase).
Note: SG for over-70s. In a related super policy change, effective from July 2013, eligible employees who are 70 years or older will receive Superannuation Guarantee (SG) payments from employers. The current SG rules stop SG entitlements when an employee turns 70 years of age. Presumably the LNP support this policy.
Reverse the Low Income Super Contribution (LISC)
Effective from 1 July 2012, the ALP introduced a super tax refund for low-income earners, who were previously penalised with higher super tax than what they paid in income tax on their own income. If you earn less than $37,000 a year, and your employer makes concessional (before-tax) superannuation contributions on your behalf, then you can expect a refund of the contributions tax deducted from your super account, paid directly to your superannuation account by the federal government.
The Coalition does not support the LISC and plans to reverse the legislation currently in place, to take effect from 1 July 2013. The LISC is long overdue, and a super policy no-brainer from my point of view. The decision to reverse it by the Coalition is risky, but politically motivated because the ALP claimed the LISC would be funded by the proceeds of the Mineral Resource Rent Tax.
On 24 October 2013, the Coalition government released draft legislation and the final version is expected to be tabled in parliament in December 2013 (see SuperGuide article Scrooge alert! Low-income earners hit with extra super tax).
Cancellation of proposed tax on pension earnings above $100,000 a year
On 6 November 2013, federal treasurer, Joe Hockey announced that the coalition government would not be proceeding with the proposed 15% tax on pension earnings above pension earnings of $100,000 a year. The effective start date was going to be 1 July 2014. The proposed tax was supposed to apply when your superannuation pension earns more than $100,000 a year, and those earnings above $100,000 would be hit with 15% tax. The threshold would have applied to each individual rather than to each pension/income stream. Note that the proposed tax was intended to apply to earnings on a pension account, rather than on benefit payments. For more information on the proposed law, and the government’s decision to not go ahead with the new tax, see SuperGuide article Goodbye to proposed tax on pension earnings over $100,000).
Introduction of PLP includes payment of SG contributions, and diluted franking credits
The Liberal Party’s Parental Leave policy includes compulsory superannuation contributions (SG) in the 26 weeks of PLP payments, which is a distinct difference from the current ALP scheme and a positive step in recognising that parental leave is like any other leave.
The Liberal Party’s Parental Leave policy is partly funded by imposing a 1.5% levy on the largest 3200 companies in Australia (any company that has a taxable income in excess of $5 million) to fund the PLP. The PLP will not be imposed on companies that have a taxable income of less than $5 million. In the Liberal’s policy document they state: “The Coalition will also provide a modest company tax cut from 1 July 2015. For large companies this will offset the cost of the paid parental leave levy, while for smaller and medium-sized companies this will be a further boost to their competitiveness, helping them to expand and create jobs.”
The contribution by the super fund members of Australia, in particular SMSF members, is the indirect result of the imposition of a 1.5% levy on large companies, and a drop in company tax at the same 1.5% rate. Fully franked dividends paid by companies come with franking credits that offset income tax payable by the investor. If the company tax rate drops to 28.5%, so does the level of franking credits.
Major review of excess contribution penalties, including those on non-concessional contributions
On 5 April 2013, the ALP federal government announced that it will allow individuals to withdraw any excess concessional contributions made from 1 July 2013 from their super fund. These excess contributions will be taxed at the individual’s actual marginal tax rate, plus an interest charge (as would happen for income tax paid late to the ATO), rather than the top marginal tax rate. If you’re already on the top marginal tax rate, then you will be hit with a new interest charge.
The Inspector-General of Taxation is currently reviewing the ATO’s handling of excess contributions tax issues. The ALP mishandled this issue and seemed to believe that only ‘rich’ people have these types of issues and so why should they bother trying to fix it. The ALP ignored the impact of the excess contributions tax penalty on non-concessional contributions. The Coalition has promised to: “Properly address the issue of excess contributions to make sure Australians savings for their retirement are not unfairly penalised for genuine unintended errors.”
Increase concessional caps, and co-contribution payments, when Budget permits
The former ALP government removed the special cap for over-50s and failed to index the existing concessional contributions cap for 6 years. The ALP re-introduced a revised over-50s cap from July 2014, and a special over-60s cap from July 2013. The Coalition has been generally vague on this issue but it is fairly safe to assume that they would support the $35,000 cap for over-60s from July 2013, and the $35,000 cap for over-50s from July 2014. In addition, the Coalition have publicly stated that the Coalition will “revisit concessional contribution caps and super co-contributions for low-income earners once the budget is back in a strong enough position.”
Tacit support for double tax on concessional contributions for high-income earners
In the May 2012 Federal budget (rather than the 2013 budget), the Federal government announced an extra tax would be imposed on the concessional contributions of anyone earning more than $300,000. Effective from 1 July 2012 (2012/2013 year), the ALP government increased the contributions tax for high-income earners (anyone earning more than $300,000) to 30%. The usual contributions tax is 15%. The LNP government publicly state it doesn’t agree with the tax but has not promised to remove this extra tax.
Review minimum pension payment rules for account-based pensions
The LNP government promises to conduct a review of the minimum pension payment rules to assess their adequacy in light of current market conditions, and to ensure self-funded retirees will not run out of savings due to inappropriate forced withdrawal of pension payments.
Regularly index the Commonwealth Seniors Health Card
The LNP promise to index annually (in September) the income thresholds for the CSHC. The indexation will start from September 2014, in line with the Consumer Price Index. The cost of this new measure will be $100 million over the next 3 years, with an expected 20,000 retirees becoming eligible for the CSHC by the 2016/2017 year, due to the new indexation measure.
Legislation introduced for extending Age Pension deeming rates to new super pensions
The Coalition government has introduced legislation into parliament that will extend Age Pension deeming rules and rates to new account-based super pensions. In April 2013, the ALP federal government announced that it intended to extend the deeming rules for the Age Pension so the deeming rules apply to new superannuation pensions from 1 January 2015. Clearly the LNP have embraced this policy with gusto, and with financially devastating effects for older Australians entering retirement.
Note: Age Pension and downsizing your home. In a related change, the former ALP government announced that from 1 July 2014, senior Australian homeowners who have owned their family home for at least 25 years may be able to downsize without losing Age Pension entitlements. I am not aware of the LNP’s position on this policy.
Improve governance of superannuation industry by requiring more independent directors
The LNP have promised to review the number of independent directors on superannuation fund boards and to require mandatory disclosure of conflicts of interests, including from those individuals who sit on multiple super fund boards.
Improve reporting standards for super funds
The LNP intend to introduce industry-wide definitions and performance benchmarks, including standard reporting for fees, gross and net investment returns and standard definitions of asset classes and investments.
Transfer small business clearing house for SG to ATO, rather than DHS
In July 2010, the ALP Federal Government launched a free superannuation clearing house for businesses that have up to 19 employees, which is administered by the Department of Human Services, via Medicare. The LNP plans to transfer the clearing house to the ATO.
Actively encourage alternative retirement income stream products
The promise from the LNP is so vague that I will have to revisit this promise at a later date. The LNP promises innovative products while protecting consumers, which can mean anything or nothing. The expectation is that this policy relates to guaranteed income products similar to annuities.
Military super to be indexed in the same way as the Age Pension
The Liberals have announced that from 1 July 2014, payments to military superannuants (members of DFRB or DFRDB) who are aged 55 years or over will be indexed in an identical way to the Age Pension, that is, indexed using one of three measures – the higher of the increase in CPI, increase in male average weekly ordinary times earnings (AWOTE) or an increase in the Pensioner and Beneficiary Living Cost Index.
According to the Liberals, this new measure will benefit 57,000 superannuants in the 2 schemes, although the Liberals do not disclose the cost of this measure in the official policy document, although it has been reported elsewhere that the Liberal option may cost around $100 million over 4 years (to be confirmed).
Hinted at reducing ATO supervisory levy for SMSFs
The LNP claim it does not agree with the massive hike in the ATO supervisory levy for SMSFs, but does not promise to reduce the levy.