The re-think of Australia’s taxation system has superannuation firmly in its sights. That’s making investors nervous, especially those with their own self-managed super fund.
The recent white paper on tax, which was prepared for the government and designed to start a conversation, has sparked debate about what some see as the disproportionate benefits of super to wealthier investors.
While SMSFs are not being directly targeted, they tend to be more active contributors to super. Consequently, they stand to be more adversely affected by any winding back of current tax arrangements.
So what is the current tax regime and what areas might be subject to change?
Super contributions tax
Individuals can make voluntary contributions to super, in addition to their employer’s super guarantee payments, on a concessional or non-concessional basis.
Concessional contributions are paid from pre-tax income and taxed at the special rate of 15 per cent rather than your marginal tax rate. As a result, if you are an employee making salary sacrifice contributions or a self-employed person making personal contributions you can reduce your tax bill.
If you are on the top tax rate of 49 per cent (including the Medicare levy and deficit levy), then you will receive a 34 per cent benefit by making concessional contributions.
However, if you earn more than $300,000 a year then you pay 30 per cent including an additional 15 per cent tax on your contributions.
If your income is at the other end of the scale then the benefit is minimal or even negative as it is likely you are not paying any tax at all. Until 2016-17, if you earn less than $37,000 a year and you or your employer make concessional contributions, you may be eligible for a refund of contributions tax of up to $500 paid directly by the federal government. This is called the low income super contribution.
Concessional contributions for the year ending June 30, 2015 are capped at $30,000 a year if you were aged 48 or under on June 30, 2014 and $35,000 for if you were 49 or over.
Non-concessional contributions are made from post-tax income so there is no contribution tax, but there are still limits. You can contribute $180,000 a year or, if you were aged 64 and under at July 1, 2014, $540,000 over a three-year rolling period.
Super earnings tax
In the accumulation phase, earnings on investments inside complying super funds are taxed at a maximum of 15 per cent. Tax credits from dividend imputation can reduce this tax liability further, while capital gains from the sale of assets held for more than 12 months are discounted to an effective tax rate of 10 per cent.
But super is most generous in the pension phase. Once you hit 60 both income on investments and withdrawals are tax free no matter how much money you have in super.
What’s on the table?
The public discussion around super tax concessions has aired a number of possible reforms.
There is talk of lifting the tax rate on concessional contributions for more Australians. Since the tax is taken from your super account, it won’t hit your current hip pocket but it will impact on your balance when you retire.
Lifetime concessional contributions could also be capped. Once your super balance was sufficient to give you a comfortable lifestyle in retirement, then you would revert to your normal marginal tax rate for contributions.
Another option is to tax the withdrawals of people with balances above a certain figure.
Dividend imputation has also come under scrutiny as the return of cash to those on low (or no) tax rates has a negative impact on government coffers.
Time to prepare
Of course all these options are just up for discussion. Depending on what changes, if any, are introduced, there is the possibility that existing arrangements may be grandfathered.
If you would like to discuss your retirement income strategy both inside and outside super, give us a call.