Superannuation, the ultimate government cash cow?

[craft]

That was all pretty underwhelming – What a bunch of Wusses.

Calling that Keating/Hawk like reform tops Domino’s calling a pizza a game changer.

 

[craft]

You have got to love Grandfathering.

Special arrangements will apply for capital gains on assets purchased before 1 July 2014:

For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;

 

[FlyingFox]

That was all pretty underwhelming – What a bunch of Wusses.

Calling that Keating/Hawk like reform tops Domino’s calling a pizza a game changer.

+1 . However a tiny tiny step in the right direction.

 

[McLovin]

This is a first step in the right direction. I doubt it will be the last. Depite the rhetoric from Abbott, I think the more sensible heads in the opposition realise the current arrangement isn't sustainable.

 

[drsmith]

Applying the same treatment to defined benefit funds

The Government will ensure that members of defined benefit funds, including federal politicians, are impacted by this new reform in the same way as members of defined contribution funds (i.e. that there will be a corresponding decrease in concessions in the retirement phase).

This will be achieved by calculating the notional earnings each year for defined benefit members in receipt of a concessionally-taxed superannuation pension. These calculations will be based on actuarial calculations, and will depend both on the size of the person's superannuation pension and their age. The amount of notional earnings each year will fall as a person grows older, in the same way that yearly earnings for people in defined contribution schemes fall over time as they draw down their capital.

Where a person's notional yearly earnings exceed the $100,000 threshold, the amount in excess of $100,000 will be subject to tax at a rate of 15 per cent. ...

Actuaries calculating notional earnings again.

The split obviously varies with age, but if it's 50/50 at age 60, the politician in question would need to be getting an annual pension of over $200k before being affected by this change. It looks to me like the politicians on defined benefit schemes have largely managed to avoid this tax change.

Overall, it's been reduced to no more than an election commitment with a small sweetener in the accumulation phase. I can't see anyone being too trusting of Labor when it comes to concessional contributions caps.

Labor has gone in to damage control. None of these changes are likely to see light of day unless the Opposition adopts them as part of their policy platform.

 

[Ves]

This is a first step in the right direction.

Looking at the press releases I get the feeling that this $100k earnings will be calculated on a Fund level.

Rich people and their advisers are not dumb. There is a glaring loophole if the threshold is restricted to the Fund and not "linked" to the individual member that will allow people to circumvent this threshold entirely.

 

[drsmith]

There is a glaring loophole if the threshold is restricted to the Fund and not "linked" to the individual member that will allow people to circumvent this threshold entirely.

I would have thought that if a retired Mr X for example had $2m in a fund and fund earnings were, say, 15% (lets say it was a good year for shares), the earnings from the fund would be $300k, regardless of what he draws down as a pension and thus his fund earnings would be subject to 15% tax on $200k.

If the following year was a poor one for investments and his fund earns 0%, he's obviously a bit stiff as he can't take advantage of the tax free nature of earnings up to $100k.

Variable returns from year to year will be a big problem with this and could capture many more than the government anticipate in a good year. One solution will be for wealthier retirees to choose more conservative investment options to minimise variation fund earnings from year to year.

Fortunately, this ill considered change has been announced as an election policy and therefore will be unlikely to see the light of day.

 

[Ves]

That's not what I'm thinking of - and I'm not saying it here - but have a think of the difference between earnings being linked to the FUND (ie. $100k as a tax exemption for a pension member claimed in the Fund's tax return) as opposed to the INDIVIDUAL - get creative. There's a solution for those canny enough to see it.

I'm assuming that the government may close the potential creativity in the actual legislation - but then again governments are notoriously bad when it actually comes to collecting tax as opposed to giving the impression that they are collecting tax.

 

[Ves]

I would have thought that if a retired Mr X for example had $2m in a fund and fund earnings were, say, 15% (lets say it was a good year for shares), the earnings from the fund would be $300k, regardless of what he draws down as a pension and thus his fund earnings would be subject to 15% tax on $200k.

If the following year was a poor one for investments and his fund earns 0%, he's obviously a bit stiff as he can't take advantage of the tax free nature of earnings up to $100k.

Variable returns from year to year will be a big problem with this and could capture many more than the government anticipate in a good year. One solution will be for wealthier retirees to choose more conservative investment options to minimise variation fund earnings from year to year.

Fortunately, this ill considered change has been announced as an election policy and therefore will be unlikely to see the light of day.

By the way, I didn't mean to sound dismissive. This is an excellent post and well worth considering.

 

[craft]

That's not what I'm thinking of - and I'm not saying it here - but have a think of the difference between earnings being linked to the FUND (ie. $100k as a tax exemption for a pension member claimed in the Fund's tax return) as opposed to the INDIVIDUAL - get creative. There's a solution for those canny enough to see it.

I'm assuming that the government may close the potential creativity in the actual legislation - but then again governments are notoriously bad when it actually comes to collecting tax as opposed to giving the impression that they are collecting tax.

Yep I can just picture you accountant's sitting around thinking mmmm multiple funds – multiple fees.

Surely the legislation would cover it, but you never know – undoubtedly something will be porous. Taxing the top end is like herding cats.

 

[craft]

I would have thought that if a retired Mr X for example had $2m in a fund and fund earnings were, say, 15% (lets say it was a good year for shares), the earnings from the fund would be $300k, regardless of what he draws down as a pension and thus his fund earnings would be subject to 15% tax on $200k.

If the following year was a poor one for investments and his fund earns 0%, he's obviously a bit stiff as he can't take advantage of the tax free nature of earnings up to $100k.

Variable returns from year to year will be a big problem with this and could capture many more than the government anticipate in a good year. One solution will be for wealthier retirees to choose more conservative investment options to minimise variation fund earnings from year to year.

Fortunately, this ill considered change has been announced as an election policy and therefore will be unlikely to see the light of day.

Variable returns and lumpiness of realising capital gains will both capture more people than the headline numbers suggest.

 

[ROE]

Notice the rise and rise of CUP (I have some sometimes ago, dont think we even have a thread for it on here) with all these crazy stuff going on generating more and more work for accountants

 

[chops_a_must]

Variable returns from year to year will be a big problem with this and could capture many more than the government anticipate in a good year. One solution will be for wealthier retirees to choose more conservative investment options to minimise variation fund earnings from year to year.

I dare say that is a part of the policy subtext.

i.e. the lack of conservative retirement options.

Would be nice to have a more accessible and liquid corporate bond market, for instance.

 

[tinhat]

Guys and Gals, my understanding of what I heard briefly on the radio while Shorten was giving his press conference is that the tax payable on income over $100k will be taxed on the individual. You've got to remember that an account in accumulation phase pays 15% tax. It is only money that is in a pension phase account that is currently tax free. But keep in mind that there are minimum drawdown rules that apply to pension phase accounts. An individual with a pension phase account is forced to draw down a certain percent each year as income. I would have thought that the income tax will be payable by the individual.The only thing I can see happening is people rejigging the balances between accumulation phase and pension phase accounts to minimise their tax exposure and try and keep as much income at or below the 15% tax rate. People will be more inclined to draw down lump sums from their accumulation account rather than pay out a pension that might exceed $100,000 due to the drawdown rules on pension accounts.

There will be more and more fiddles with the rules I am sure. The Costello reforms were so generous I never believed they would be sustainable. Something else that will get reformed will be how much a person of retirement age must commit to pension account and also the fact that under Costello's reforms a person of pension age can just dip in and grab lump sums tax free as much as they want. That's not going to last long-term either. Basically the Costello reforms are going to have to be unwound eventually because everyone knows they are not sustainable for the income tax base.

As I said in my last post, it is better to see that no tax is paid on the way in and then tax on the way out. This is more equitable for low income earners and this is a better economic outcome for the country as it will have a substantial compounding effect on national savings and will actually grow the income tax base from super savings in the long term.

No one's got the balls to fix the income tax system to make it truly simple and equitable and an inducement to low income earners receiving family benefits to work full time.

 

[ROE]

All up on AFR with details
http://www.afr.com/p/national/labor_caps_tax_free_super_earnings_GQcUMka42N7LHKj6C6K8VO



The federal government is proposing a $100,000 cap on the tax-free earnings that can be generated from superannuation assets after retirement, as the central plank of measures it says will save $900 million over four years but $10 billion over 10 years.

Contrary to earlier indications that the government might try to target the benefits high-income earners could get from superannuation in the accumulation phase, and/or target the capital gains arrangements of self-managed super funds, the Government has homed in on the value of tax concessions after retirement, but not reimposed a tax on actual superannuation withdrawals.

Treasurer Wayne Swan and Superannuation Minister Bill Shorten could not say on Friday whether the proposed changes would actually be introduced into parliament before the federal election.

But the changes are prospective – beginning on July 1 next year – so in effect become a mandate issue for the election.

The government says the changes are not retrospective, setting out a grandfathering arrangement for assets held in super funds before today that will exempt them from the new arrangements for 10 years.

The government says the changes will affect only about 16,000 people in 2014-15 because the $100,000 cap, which will be indexed to inflation, means that only individuals with superannuation funds worth $2 million or more – on a conservatively estimated 5 per cent annual earnings rate – would breach the cap.

 

[tinhat]

I'm just reading an article in the SMH and it seems I am mistaken. Tax will be on the income earned in the fund not the pension income. I assume that the $100,000 income will be the total for all super accounts - both pension and accumulation.

edit - thanks ROE.

 

[ROE]

I'm just reading an article in the SMH and it seems I am mistaken. Tax will be on the income earned in the fund not the pension income. I assume that the $100,000 income will be the total for all super accounts - both pension and accumulation.

edit - thanks ROE.

very details long article on AFR if you dont have access I can PM you...

Personally I think it is not too bad ..someone on 100K tax free earning is enough to live a good life style
anything after 15% tax sound ok... there is a little bit of capitalist left in labor

someone with 3m plus account will do with a little less and I am sure they wont be happy

 

[prawn_86]

someone with 3m plus account will do with a little less and I am sure they wont be happy

Or they will just invest it a bit more conservatively which is probably a good thing as they wont be taking risks which may eventually cause them to draw a pension

 

[Julia]

Maybe think about the fact that this change is only mooted presumably to quell all the damaging speculation that Labor so unwisely allowed to start.

The proposed reforms will not be legislated before the election, after which the Coalition will be running the show. Given his frothing at the mouth today about this 'reform', Mr Abbott can hardly legislate it or anything similar.

So people might stop running around frantically rearranging their financial affairs and further contributing via fees to the retirement plans of the financial planners.

 

[skc]

Or they will just invest it a bit more conservatively which is probably a good thing as they wont be taking risks which may eventually cause them to draw a pension

If I earn $100k there's $0 tax so my after tax income is $100k.

If I earn $150k there's 15% tax on that extra $50k, so I pay $7.5k tax and left with after tax income of $142.5k.

So in order to avoid paying $7.5k tax I should invest conservatively and forgo $42.5k of after tax income

That's putting the tax cart in front of the income horse...