Superannuation reforms announced by Federal Government today “will be a slap in the face for many who have been saving for their retirement under the current rules”, according to leading business and financial advisory firm Grant Thornton Australia Limited.
While some of the reforms are welcomed, such as the increase in the concessional cap, there is a strong view that this seems to be more about winning an election than long term reform.
“Unfortunately, the reforms do little more than add further complexity to the system, and increase the fear and uncertainty that most individuals have in respect of their retirement savings,” said Grant Thornton Wealth Advisory Services Partner Dennis Eagles.
“The superannuation industry will be significantly impacted with the costs of substantial changes to their systems, when they are already confronting the substantial costs of transition to MySuper and other regulatory reforms – costs that are being borne by all members.”
The Government announced this morning an intention to reform the superannuation system with reforms that aim to “improve the fairness, sustainability and efficiency of the superannuation system”. The major revenue raising aspect of the proposals is the announcement that, from 1 July 2014, the tax free earnings held inside the superannuation account balances of retirees drawing an income stream will be capped to the first $100,000 per year. 15% tax will be applied to all income in excess of $100,000 – i.e. as if the account was still in accumulation phase. Currently all income earned by superannuation funds from assets supporting income streams are free from tax.
“The Government is targeting retirees who have already accumulated significant wealth within superannuation for their retirement and, under the guise of fairness, are penalising them for self-funding their own retirement,” said Mr Eagles.
“Treasury estimates indicate that only 16,000 individuals are to be affected by the reform, but it is extremely naïve to think that all fund members will not be impacted as trustees will seek to pass on the significant additional costs of implementing and administering these reforms.”
“The superannuation industry will need to spend millions of dollars to be able to administer these rules. Systems that are designed to treat overall pension earnings as tax-free would need to examine each member separately and determine if the additional tax is applicable. The moving parts to do this are many, which must lead to huge transitional costs. It is also unclear how these rules will apply where there are multiple account balances across different funds,” he said.
The Government has also announced that the concessional contributions cap will be increased to $35,000 for those over 60 at 1 July 2013, and extended to those over 50 at 1 July 2014. A limit of $25,000 currently applies to all, regardless of age.
“Any increase in the concessional cap is certainly a welcome reform, but this seems to be more about winning an election than long term reform” Mr Eagles said, “the devil is in the detail. The current cap is indexed by CPI and is expected, on Treasury estimates to reach $35,000 by 2018. The reform is not indexed, and accordingly the benefit to those eligible is short term.” Proposed reforms to the excess contributions tax are also welcomed. From 1 July 2013, the Government will allow excess contributions to be refunded and will tax these at the individual’s marginal tax rate (plus an interest charge).
“This reform will ensure that taxpayers will pay their usual rate of tax on these amounts, rather than 46.5% or more. This is a fair outcome, given that almost all excess contributions are the result of inadvertent factors, such as the timing of when employers pay contributions,” said Mr Eagles.
Low and middle income earners may also be impacted by a reform to include account-based income streams in income testing for social security purposes. While income streams commenced before 1 January 2015 will be quarantined from this, those started after that date will be counted in income tests when determining old age pensions.
“The reform has been made by the Government to remove an inequality in their testing between those that have used superannuation for retirement and those that have saved elsewhere. However, it will be a slap in the face for many who have been saving for their retirement under the current rules.”
About Grant Thornton Australia Limited Grant Thornton Australia provides audit, tax and advisory services to dynamic, growing organisations and is a single national firm operating from eight offices, with over 150 Partners, more than 1,200 people across Australia and national turnover of AUD $232 million. Grant Thornton International is the fastest growing international accounting network in the world, with a global turnover of US$3.7 billion and more than 30,000 people and 2,500 partners.
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About Grant Thornton Australia Limited
Grant Thornton Australia provides audit, tax and advisory services to dynamic, growing organisations and is a single national firm operating from eight offices, with over 150 Partners, more than 1,200 people across Australia and national turnover of AUD $232 million. Grant Thornton International is the fastest growing international accounting network in the world, with a global turnover of US$3.7billion and more than 30,000 people and 2,500 partners.