In April 2013, the federal government proposed reforms to the superannuation system that will, if and when they are adopted, affect members of all types of super funds.
Although some of the changes are expected to benefit some, Treasury expects that about 16,000 people will be worse off in 2014-15. As part of the plan, the government aims to separate super from politics by setting up a Council of Superannuation Custodians who will oversee and minimize future changes to the system.
For now, these are some of the pending changes you should be aware of :
1. Review of pre-tax contributions to super
If you’re over 60 years old, you will be allowed to add up to $35,000 (unindexed) before tax to your super fund. This has been raised from the previous $25,000 cap, helping people who are approaching retirement to increase their savings. This increase will come into effect July 1 this year. The same higher limit will apply to people over 50 from July 1 next year.
All contributors are advised to check that you are not contributing too much. Anyone adding more than the capped allowance after July 1 2013 can withdraw the excess from the fund and have it taxed at their marginal rate, plus interest. Add too much before then and the money must stay in the fund and be taxed at 46.5%. People who breach the concessional contribution limit plus the limit that applies to post-tax contributions will be hit with a 93% tax.
2. Review your fund’s income
From July 1 2014, super funds that pay out a pension will be taxed at 15% on earnings above $100,000. This limit will be indexed to inflation, increasing in $10,000 lots. You will need to pay some tax if your balance exceeds $2M and earns more than 5% tax p.a. You will also need to pay tax if your balance exceeds $1.25M earning more than 8% p.a.
3. Reconsider a deferred lifetime annuity
Private pensions begin paying out a regular amount after a set period of time. Payments continue for the rest of the owner’s life. Owners receive no concessional tax treatment at present but from July 1, 2014, they’ll be taxed at the same low rate as super assets that support a pension.
4. Consider starting a pension before Jan 1, 2015
New private pensions started from super after Jan 1, 2015 will be considered income (like share dividends or term deposit interest) when assessing eligibility for the government aged pension. This will not affect people with existing pensions.
5. Review capital gains
If you have a super fund that pays out a pension or are planning to start one soon, think about restructuring investments that have made capital gains. This will be taxed in the future. For assets bought after April 5, 2013, but before June 30, 2014, fund members will be able to choose to have the tax applied to the entire capital gain, or only part thereof accrued after July 1, 2014. Assets purchased after July 1, 2014 will have tax applied on the entire capital gain.
6. Find you lost super
Inactive super accounts with balances of $2,000 or less will be transferred to the ATO for protection from fees and charges. This limit will rise to $2,500 from December 31, 2015 and to $3,000 from December 31, 2016. If you have any such lost super, look for it and reclaim it.
This article is summarized from ‘Superannuation Cheat Sheet’ article in the May 2013 edition of afrsmartinvestor.com