23 April 2019
By Colin Lewis,
With the upcoming election, it’s worth revisiting Labor’s proposed changes to superannuation.
Firstly, Labor wants to reduce the non-concessional contributions cap to $75,000 a year (currently $100,000). This would reduce the maximum three-year bring-forward to $225,000 (currently $300,000).
Building your retirement nest egg in super would become harder under Labor. People would need to plan and start saving earlier with super, and look to alternative tax structures to investment in, e.g. investing personally, between spouses, in investment bonds and discretionary (family) trusts.
Labor wants to abolish personal deductible contributions by employees; taking us back to the old ‘10% test’.
Employees would only be able to make salary sacrifice contributions as they would be unable to claim a tax deduction on their personal contributions unless they earn no more the 10 percent of their income from employment.
The 10% test was removed with the super reforms that commenced from 1 July 2017.
Labor also wants to abolish the carry-forward of unused concessional contributions cap amounts.
This initiative only just got off the ground to help people make catch-up contributions. Unused cap amounts starting in the 2018/19 income year can now be carried forward on a rolling five-year basis, provided the individual has less than $500,000 in the super system at the previous June, 30.
The upcoming 2019/20 income year will be the first year it can be applied.
Labor will also abolish first home super saver accounts.
This is a convoluted system providing little benefit relative to the price of housing. Getting money in is easy but getting it out is another thing. It’s cumbersome and you’re penalized if you muck up the timing of buying your place and accessing your money.
Superannuation and housing policy – at least this measure – should never have been mixed in the first place.
Labor will introduce compulsory employer Superannuation Guarantee (SG) contributions on the Government’s paid parental leave scheme. And it will phase out the $450 a month threshold for SG. Thus, employers would be required to pay SG contributions from the first dollar earned by an employee. There would be no breathing space, not even for ‘small’ employers.
Labor will also reduce the income threshold where the additional contributions tax (Division 293 tax) applies to $200,000 (currently $250,000).
Division 293 tax is an additional 15 percent tax on taxable super contributions for people whose combined income and contributions currently exceed $250,000 a year.
Taxable contributions are concessional (pre-tax) contributions which are employer contributions, including SG and salary sacrifice contributions, and personal contributions for which a tax deduction is claimed.
It does not apply to non-concessional (after-tax) contributions.
Interestingly, people disregard this tax as they don’t think it applies to them because their wage is nowhere near this amount. But it’s not just about your salary – it can be much more.
Income for Division 293 tax purposes includes your taxable income (assessable income less allowable deductions), reportable fringe benefits, net investment losses and rental property losses (i.e. negative gearing losses), and any amount on which family trust distribution tax is paid.
Generally, people fail to consider items that make up their assessable income, including investment earnings, assessable capital gains (say from the sale of an investment property or parcel of shares they’ve inherited), payments on termination of employment and franking credits on dividend income.
This income together with their concessional contributions (including SG) within the cap may push them over the threshold in a year and expose them to additional tax they didn’t expect on those contributions.
Take Ron whose salary package including superannuation is $150,000 a year, i.e. $136,986 cash salary and SG of $13,014. Ron makes a personal deductible contribution of $11,986 to take him up to the concessional contributions cap of $25,000. Note: Ron will have to go back to making salary sacrifice contributions if Labor wins power and their policies get up.
His income for Division 293 tax purposes comprises net salary of $125,000 ($136,986 – $11,986), interest income of $5,000, an $80,000 capital gain from the sale of a rental property during the year and a rental loss of $15,000 before the sale of that property. Accordingly, his income ($225,000) and taxable super contributions ($25,000) combined is $250,000 and he doesn’t pay additional contributions tax.
However, if Ron earns one dollar more then he will pay the usual 45 cents in income tax plus 2 cents in Medicare levy, but now he will also pay 15 cents in Division 293 tax because this tax is paid on his taxable super contributions that take his income over the $250,000 threshold; in Ron’s case $1. This is effectively 62 percent tax on that one dollar of extra income. Ron keeps just 38 cents of what he’s just earnt. And if Ron doesn’t have private health insurance then there’s another 1.5 cents Medicare Levy Surcharge, making it 63.5 percent tax, eroding even further what he takes home. This is the case for up to $25,000 of income from $250,000 to $275,000.
Ron may be able to avoid this tax as it comes down to the source of his income. Say all his income came from employment, then there’s little he can do. However, as he’s got investment income, he could consider moving his investments into tax structures where earnings aren’t derived in his name, e.g. super or an investment bond. Thus, he may be able to manage his finances to keep his income below the threshold.
Dropping the threshold to $200,000 a year will obviously capture more people in this tax net. In Ron’s case, he would face a $3,750 Division 293 tax bill.
Finally, in SMSF space, Labor will ban new limited recourse borrowing arrangements. And disallowing refunds of excess franking credits would mean members in retirement phase will no longer receive refunds for the franking credits they get from Australian share investments.