The 2012 Federal Budget has introduced further changes to the super rules, which we cover in other articles on this website. In this article, we explain the super changes the government snuck through in November 2011 although Federal Treasurer, Wayne Swan, may be hoping that we forget his earlier tinkering with the super rules.
In November 2011, Mr Swan announced three superannuation changes that will negatively impact on the super savings of Australians. He also announced a one-year extension to a measure that would relieve some of the financial pressure for retired Australians.
The superannuation changes announced in November 2011 were:
- Freeze indexation of contributions caps for the 2013/2014 year (but also for the 2012/2013 year).
- Halve co-contribution payments and reduce income threshold for eligibility from 1 July 2012
- Changes to the yet-to-be-introduced Low Income Superannuation Contribution (LISC) (to be introduced from 1 July 2012) to exclude some low-income earners
- Extend 25% minimum pension payment relief for 2012/2013 year, in addition to the 2011/2012 year.
In an attempt to protect the 2012/2013 Federal Budget surplus which was promised after the Global Financial Crisis savaged world economies, and then re-promised in the May 2011 Budget, Federal Treasurer Wayne Swan tinkered with the super rules, yet again. On 29 November 2011, Wayne Swan released the 2011/2012 Mid-year Economic and Fiscal Outlook. As part of this Outlook, Mr Swan announced the changes listed above.
I explain each of these November 2011 changes below.
Freeze indexation of contributions cap for the 2012/2013 and 2013/2014 years
I believe this policy change is ridiculous for two reasons. First, the Government is not being honest about the length of time the freezing of the caps is to last. In the Mid-year Outlook it stated that the concessional cap will be frozen for the 2013/2014 year and remain at $25,000, when the Government then expects the cap to increase to $30,000 from the 2014/2015 year. My understanding is that the concessional cap was to increase to $30,000 from the 2012/2013 (from July 2012) and not from 2013/2014 year, which means the Government is freezing the caps for 2 years. I remind our SuperGuide readers that the contributions caps were not indexed when they were supposed to be in July 2009. Instead the Government halved the concessional (before-tax) contributions caps and then announced indexation of both caps would commence from July 2009 (and now the over-50s cap is going to be $25,000 – see SuperGuide article Another super con: Over-50s contributions cap removed).
By taking this approach the Government has not only frozen indexation but rolled back accumulated increases in the cap that would trigger an adjustment in the caps. Since the new caps were originally introduced in July 2007, the contributions caps have never been adjusted in line with inflation. Some may consider this trend to mean the contributions caps are on a permanent freeze.
Note: The over-50s concessional cap (since removed in the May 2012 Budget) and the non-concessional cap will also be frozen for 2 years, even though the Government states the non-concessional cap is frozen for only one year.
The second reason why I think this policy change is ridiculous is that we currently have tens of thousands of Australians paying excess contributions tax due to poorly implemented contributions caps. The amount the Government is collecting in unfairly imposed excess contributions tax should be enough suffering by super savers ‘for the budget surplus cause’, rather than tinkering with the contributions caps again (and yet again in the May 2012 Federal Budget by removing the over-50s concessional contributions cap and hitting high-income earners with extra contributions tax).
Fix the excess contributions tax issue first before upsetting the retirement plans of Australians yet again.
Note: The Government estimates the freezing of the contributions caps will save $485 million over 2 years.
Cut co-contribution payments by half from 1 July 2012
In November 2011, the Government also announced that it will halve the matching rate (currently $1 co-contribution for $1 voluntary non-concessional contribution up to a maximum amount) and halve the maximum co-contribution payment (currently $1,000 which was recently reduced from $1,500). What this means is that the Government will halve the co-contribution matching rate to 50 cents for every dollar contributed, and the maximum co-contribution payment will fall to $500. In other words, eligible Australians who contribute up to $1,000 in non-concessional contributions will receive a maximum co-contribution of $500.
I remind our SuperGuide readers that the Government has previously announced that the maximum co-contribution payment would increase to $1,250 for the 2012/2013 and 2013/2014 years and then eventually return to $1,500 from 1 July 2014. The Government also froze the income thresholds for co-contribution eligibility for the 2010/2011 and 2011/2012 years. The co-contribution will never return to $1,500 and it will never return to $1,000 after this year.
That’s not the end of the bad news. The Government also intends to lower the income thresholds for testing an individual’s entitlement to a co-contribution. The current income thresholds are $31,920 (lower) and $61,920 (upper). From 1 July 2012, if you earn more than $46,920 you will not be entitled to a co-contribution, although it appears that the lower threshold is remaining at $31,920 for the moment. The Government believes the Low-Income Superannuation Contribution (see next policy measure below) is a better policy and will help more low-income earners.
I agree that the Low Income Superannuation Contribution (LISC) is a fair and long-awaited policy but if it is being introduced to replace the co-contribution, why is the co-contribution cut being announced as a budget measure to reduce expenditure (by a whopping $1 billion over 3 years) in order to keep the Government in surplus? For goodness sake, at least be honest about the destruction of the co-contribution scheme to meet the surplus rather than attempting to make it some noble decision that makes those affected better off. And now, from July 2012, we have only one concessional contributions cap for all ages (see SuperGuide article Another super con: Over-50s contributions cap removed).
Note: The co-contribution cuts are designed to fund a third of the cost of the LISC policy. The Government estimates that by cutting the co-contribution it can save $660 million (but didn’t I read $1.023 billion in the estimates?) which is around one-third of the cost of the low income superannuation contribution ($1.9 billion over 3 years).
Changes to Low Income Superannuation Contribution (LISC)
In its response to the Henry Tax Review, the Federal Government announced that from 1 July 2012, individuals earning up to $37,000 will be no worse off tax-wise by receiving Superannuation Guarantee contributions. Any tax deducted from superannuation guarantee (SG) contributions made on behalf of individuals earning less than $37,000 will be returned to the super accounts of the affected individuals.
In November 2011, the Government announced some changes to the implementation of this policy which I will explain after I outline how the LISC works In the past, SuperGuide has flagged that Australians earning less than $37,000, that is, those paying 15 cents tax or less in the dollar, received no tax incentives to save for retirement. In some cases, Australian workers who paid less than 15 cents in the dollar income tax, ended up being penalised tax-wise by the superannuation system. For example, you may not pay any tax on your personal income due to the level of income that you earn, but if your employer paid Superannuation Guarantee contributions into your super fund, those contributions were hit with 15% contributions tax. What this means, is that workers on lower incomes are being financially penalised by the superannuation system rather than receiving tax incentives.
Under the LISC policy, the 15 per cent contributions tax will be refunded into their superannuation accounts. Individuals can expect a refund of contributions tax of up to $500 each year, paid into the super accounts of Australians earning $37,000 or less, to ensure they receive a similar incentive for retirement savings, as Australians on higher incomes. According to the Federal Government, “The LISC will benefit over three times as many low-income earners as the current co-contribution, and is better targeted in boosting retirement savings. This is because low-income earners can only access the co-contribution if they make additional superannuation contributions from their income or savings, whereas all low-income earners who receive compulsory SG contributions will automatically benefit from the new initiative.”
Well, I’m not so sure that ‘all low-income earners’ will benefit from the LISC. The Government announced some changes to the LISC as part of its strategy to keep the budget in surplus. Those changes are:
- Individuals who receive less than 10 per cent of their income through employment or business will not be eligible, which means there will be many thousands of low-income earning Australians (more than 50,000 and probably more, on my calculations).
- Individuals only receive a payment if their LISC entitlement is at least $20, to reduce administration costs. This change is more understandable from a practical point of view, but from an equity point of view, this change means that there will still be many Aussie paying higher rates of tax on their SG payments than what they pay on their personal income. That doesn’t seem very fair to me, but in this instance the cost of paying out $10 or $5 would not justify the tax benefit.
A reasonably positive change to the LISC is that the Government has introduced a verification process to remove the requirement for low-income earners to lodge a tax return solely to receive the tax refund under the LISC. Instead, the Australian Taxation Office (ATO) will verify an individual’s income using available data. According to Government estimates, this small change in administration will ensure that an additional 100,000 individuals earning up to $37,000 will now receive the LISC.
Note: According to the Government, about 3.6 million Australians will receive a tax refund (but I bet you many of them would have preferred the $1000 or $1500 co-contribution that used to be available).
Extend 25% minimum pension payment relief for 2012/2013 year
According to the Government, “around 125,000 self-funded retirees will benefit from an extension of drawdown relief for account-based pensions to the 2012-13 year, with a 25 per cent reduction in the minimum payment amounts for these products” (Bill Shorten Media Release No 162, 29 November 2011) Previously, the Government halved the minimum payment amounts for account-based pensions for the 2008/2009, 2009/2010 and 2010/2011 financial years, and a 25% reduction is currently available for the 2011/2012 year. For more information on this measure, including specific minimum pension payment percentages, see separate SuperGuide article What a relief! Minimum pension payments reduced by 25% for 2011/2012 and 2012/2013 years