ANNOUNCED REFORMS TO THE SUPERANNUATION SYSTEM:

Transcription

1 SECURING RETIREMENT INCOMES ANNOUNCED REFORMS TO THE SUPERANNUATION SYSTEM: WHAT DOES IT REALLY MEAN FOR YOU? APRIL 2013

2 CONTENTS 1 Introduction 2 Reforming the tax exemption for earnings on super assets supporting income streams 4 Reforming the tax exemption for earnings on super assets supporting income streams - application to defined benefit pensions 6 Higher concessional contributions cap 7 Treatment of excess concessional contributions 8 Extension of deeming rules to superannuation account-based income streams 9 Extending concessional tax treatment to deferred lifetime annuities 10 Further reforms to arrangements for lost superannuation 11 Council of Superannuation Custodians

3 More changes to superannuation have been announced by the Government. Considerable clarification of the proposals will be needed before final conclusions can be drawn and whether these proposed reforms will ever eventuate may depend on the outcome of the election. However, superannuation impacts most Australian households, and super funds and members, as well as employers should understand what the proposed changes are and how they may be impacted. In this report Mercer has gone a step further than just outlining the changes we have thought about and outlined the impact for individuals, both working and retired, superannuation trustees and providers, and employers. Mercer understands superannuation like few others because we have experts in every field of superannuation. The announced changes are not legislated yet, and we don t know if they ever will be, but we can help you understand how to be ready for what superannuation looks like now and will look like in the future. What was announced? On Friday 5th April, the Deputy Prime Minister and Treasurer, Wayne Swan, and Minister for Superannuation the Hon Bill Shorten announced, on behalf of the Gillard Government, a number of reforms to further improve the fairness of superannuation tax concessions : From 1 July 2014 the tax exemption for earnings on superannuation assets supporting income streams is to be capped at $100,000 a year for each individual, with a concessional tax rate of 15 per cent applying thereafter; A higher concessional contributions cap of $35,000 is to apply for people aged 60 and over from 1 July 2013 and for people aged 50 and over from 1 July 2014; Concessional contributions paid from 1 July 2013 which are in excess of the annual cap will be able to be withdrawn and taxed at marginal rates however there will be a new interest charge on excess concessional contributions tax; Account-based superannuation income streams commenced from 1 January 2015 will be subject to the normal deeming rules for social security pension income tests; From 1 July 2014 deferred lifetime annuities will be eligible for the same concessional tax treatment as current income streams; and The account balance threshold for lost super to be transferred to the ATO will be further increased from 31 December 2015 and again from 31 December The Government has stated that these reforms are estimated to save around $900 million for the Government over the forward estimates period. Although the changes have been announced, and the savings will be taken into account in the Government s May Budget, it is unlikely the Government will attempt to legislate these changes before the September election. However, we understand it will try and implement its earlier announcements applicable from 1 July 2012 relating to a reduction in the Government co-contribution and a doubling of the contribution tax for those earning more than $300,000. Implications not just for large super balances The proposed changes will apply to a broad spectrum of Australians, not just those with very large accounts, and more Australians will need more financial advice both in the short and longer term. Those potentially impacted include: Those close to retirement, with relatively low superannuation assets, who may be impacted by the proposed changes to the age pension income test (in particular, consideration will need to be given to whether there are advantages in commencing an income stream before 1 January 2015 to lock in the current test) Couples who can potentially reduce the impact of the proposed additional tax by splitting their superannuation more evenly Those who may be able to increase their contributions due to the higher concessional contribution cap Those who exceed the excess concessional contribution cap ANNOUNCED REFORMS TO THE SUPERANNUATION SYSTEM: WHAT DOES IT REALLY MEAN FOR YOU? 1

4 Proposed changes & their IMPLICATIONS 1. Reforming the TAx exemption for earnings on super ASSETS supporting income streams From 1 July 2014, earnings on assets supporting income streams will be tax free up to $100,000 for each individual. Earnings above $100,000 will be taxed at 15% (as applies on earnings on assets in the accumulation phase). The $100,000 threshold will be indexed to CPI and will increase in $10,000 increments. Transitional arrangements will apply to capital gains on assets purchased before 1 July 2014: For assets purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024; For assets purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and For assets purchased from 1 July 2014, the reform will apply to the entire capital gain. These transitional arrangements will provide those who have already purchased superannuation assets 10 years to restructure their superannuation arrangements before their capital gains are impacted. Pension payments received by an individual aged 60 or over will continue to be received tax free. Individuals aged between preservation age and 60 years will continue to declare their pension income in their income tax return. Mercer comments We anticipate the administration of this reform could prove to be extremely complex. In particular it is unclear whether the superannuation fund or the pensioner will be liable for the additional tax. Two of the major complexities are: An individual may have more than one income stream (potentially in different funds). We expect in such cases the $100,000 earnings limit will apply across all their accounts in total, but the funds will have no way of determining what portion of each account they hold should be subject to the tax. The most appropriate manner to approach this issue would be for the ATO to collect investment return information from superannuation funds, amalgamate the returns from different income streams and assess the member for the additional tax. The announcement implies taxable investment income will need to be determined at individual member account level. This is not how funds generally operate at present where in most cases investment earnings passed on to member accounts include allowance for both realised and unrealised capital gains (as well as income) and tax calculations are performed at fund level. In effect the announcement assumes each superannuation fund member has their own allocated assets. Whilst this may be workable in a one member Self Managed Superannuation Fund it seems much further work and significant industry consultation will be necessary before a workable approximation can be achieved for funds with more than one member. 2

5 Impact on employers Nil Impact on employees/retirees/members This measure will not directly impact superannuation fund members until they commence drawing down a superannuation pension. However superannuation funds may incur additional costs which may increase fees over the long term. This proposal is also unlikely to impact on members receiving small income streams. The Government stated It is estimated that this reform will affect individuals with more than $2 million in assets supporting an income stream (based on a rate of return of 5%). However because of fluctuations in returns much lower account balances could be affected in years of relatively high returns. Similarly, if capital gains are accrued over a number of years and are counted in full in the year they are realised, then much lower account balances could be affected. The Government estimates about 16,000 people will be affected in We expect many more than 16,000 members will be affected in some years. The number of affected members will also increase over time due to: The indexation arrangements (CPI rather than AWOTE and only in increments of $10,000) resulting in the real value of the $100,000 tax free threshold being eroded over time More members retiring in future years with higher account balances It appears many members will be able to lower the impact of this new tax by reducing their account balance and transferring amounts to their spouse s superannuation account. This could be achieved by either contribution splitting or by cashing part of their superannuation benefit at retirement and recontributing it to their spouses account (subject to the non-concessional contribution limits and other rules such as the work test if the spouse is aged 65 or more). Impact on trustees and superannuation providers We expect superannuation funds will be required to increase the level of reporting in respect of investment earnings relating to income streams. It may be necessary to break down investment returns between realised capital gains, unrealised gains and other income. It may also be necessary to distinguish between realised gains depending on the date the underlying assets were purchased. Trustees and providers will need to place greater emphasis on providing accounts for members spouses, have arrangements in place to deal with potential increases in contribution splitting and simple arrangements by which retiring members can cash and recontribute to their spouse s account. ANNOUNCED REFORMS TO THE SUPERANNUATION SYSTEM: WHAT DOES IT REALLY MEAN FOR YOU? 3

6 2. Reforming the TAx exemption for earnings on super ASSETS supporting income streams application TO defined benefit pensions The Government said it will ensure that members of defined benefit (DB) 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). The Government has indicated this will be achieved by calculating the notional investment earnings each year for defined benefit members in receipt of a concessionally-taxed superannuation pension. 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%. The notional earnings will be based on actuarial calculations and will depend both on the size of the person s superannuation pension and their age. The Government said the amount of notional earnings each year will fall as a person grows older, in the same way yearly earnings for people in defined contribution schemes fall over time as they draw down their capital. Mercer comments Again there is little detail as to how this measure will work in practice and the administration of this reform could prove to be complex: Appropriate factors will need to be determined for each fund with DB pensions, presumably in accordance with a yet to be determined statutory actuarial basis The treatment of pensions which have discretionary increases will need particular consideration An individual may have more than one income stream (potentially both DB and non-db in different funds). Ensuring this measure can be applied to the various types of public sector funds, in particular politicians, judges and federal public servants will also require ingenuity. This is more likely to be achievable if the tax is payable by the individual pensioners. Impact on employers The impact on employers will depend on how the new tax is implemented. If the tax is payable by the member, there is unlikely to be an impact on the employer (other than some increase in fund administration costs). 4

7 However, if the tax is imposed on the superannuation fund, it may be difficult to pass the additional tax costs onto existing pensioners and even to those who are not yet entitled to a pension. Existing trust deed provisions may restrict any reduction in current and future pension entitlements. Where benefits cannot be reduced, the employer is likely to incur additional cost increases. Impact on employees/retirees/members This will have no direct impact on members who are not entitled to a defined benefit pension. Members with a large income stream (either now or in the future) may be liable for additional tax or a reduction in their defined benefit pension. The impact on defined benefit pensioners will largely depend on the deemed rate of investment return and the method of valuing pensions. As the deemed rate of investment return is unlikely to vary from year to year, there will be greater stability in the level of additional tax compared with account based income streams. Impact on trustees and superannuation providers Depending on how the tax is to be applied, trustees and superannuation providers may need to give careful consideration to whether it is possible to reduce pension entitlements to offset the new tax. ANNOUNCED REFORMS TO THE SUPERANNUATION SYSTEM: WHAT DOES IT REALLY MEAN FOR YOU? 5

8 3. Higher concessional contributions cap The Government had previously announced a higher concessional contributions cap of $50,000 would apply from 1 July 2014 for individuals with balances below $500,000. Following feedback from industry indicating this requirement would be difficult to administer, a cap of $35,000 (unindexed), regardless of account balance will apply: from 1 July 2013 for people aged 60 and over; and from 1 July 2014 for people aged 50 and over. Mercer comments This is a welcome change given the cost and complexity involved with the previous proposal of linking the higher cap to a member s total account balance across all funds. However, it is disappointing the higher cap will not be indexed. Impact on employees/retirees/members This will be a welcome change for those employees in the relevant age categories who can afford to salary sacrifice additional contributions to superannuation. However the lack of indexation will mean the benefits are short-lived. Employees/members should not rely on the announcement but should wait until the changes are legislated before exceeding the current $25,000 concessional contribution limit. Impact on trustees and superannuation providers The impact is minor although slightly higher contributions can be expected in the next few years and communication material will need to be rewritten. The general concessional cap is expected to be indexed from $25,000 to $30,000 from 1 July It is expected to reach $35,000 from 1 July Impact on employers Nil 6

9 4. TreATMenT of excess concessional contributions Currently concessional contributions in excess of the annual cap are taxed at 46.5% rather than 15% regardless of income. This is a severe penalty for individuals with income below the top marginal rate. The Government has announced excess concessional contributions made from 1 July 2013 will be permitted to be withdrawn from the superannuation fund (currently there is a once-off option for up to $10,000 of excess concessional contributions to be withdrawn). In addition, excess concessional contributions will be taxed at the individual s marginal tax rate, plus an interest charge it appears this will apply whether or not the excess concessional contributions are withdrawn. This is to ensure individuals are taxed on excess concessional contributions in the same way as if they had received the amount as salary or wages and chosen to make a non-concessional contribution. We also consider it would be reasonable to allow members to withdraw contributions before the end of the year where it has become obvious the contribution limit has been exceeded. Impact on employers Nil Impact on employees/retirees/members This will result in a more equitable outcome where excess concessional contribution limits are breached. Impact on trustees and superannuation providers Little impact although there is likely to be an increase in the number of refunds of contributions. Mercer comments We welcome this change. However, there is no detail on the proposed interest charge, which adds complexity. In effect, it removes the current interest free loan for those who make excess contributions. ANNOUNCED REFORMS TO THE SUPERANNUATION SYSTEM: WHAT DOES IT REALLY MEAN FOR YOU? 7

10 5. Extension of deeming rules TO SUPERANNUATION account-based income streams New superannuation account-based income streams will be subject to the standard pension deeming arrangements for the purposes of the pension income test after 1 January All account based income streams established prior to 1 January 2015 with be grandfathered indefinitely and continue to be assessed under the existing rules for the life of the product. In other words current pensioners will not be affected and their current super income streams will not be subject to deeming unless they choose to change products. Mercer comments; This measure is essentially a tightening up of the pension income test. It may encourage members over age 55 to commence a transition to retirement pension before 1 January 2015 in order to maintain the current deeming approach. Impact on employers This change may encourage some members close to retirement to retire early so they can lock in a superannuation pension on the current income test rules. Impact on employees/retirees/members Initially, this change is more likely to adversely affect those with much smaller income stream balances (commencing on or after 1 January 2015). Those with larger income stream balances may be impacted in later years as their account balance falls. If this change is legislated, members not yet in receipt of a superannuation income stream should consider whether it is appropriate to commence one before 1 January 2015 in order to lock in the current income test treatment. For example, this could include a transition to retirement income stream. Impact on trustees and superannuation providers The suitability of existing transition to retirement pension options should be considered. Communication material may also need to be reviewed. This will particularly impact trustees and providers who provide calculators which take the age pension into account. Calculators will need to become more complex to allow for the potential differences in income tests. Similar implications arise for those considering issuing retirement forecasts allowing for the age pension. Further, this change will result in a potential barrier to fund mergers after 1 January 2015 as existing pensioners could become worse off if their income stream in the new fund is to be tested under the new rules. 8

11 6. Extending concessional TAx TREATMENT to deferred lifetime annuities From 1 July 2014 deferred lifetime annuities will have the same concessional tax treatment as superannuation income streams. Mercer comments: This is a welcome reform which has been called for by the superannuation industry to enhance the attractiveness for retirees of protecting against longevity risk via deferred annuities. We expect it will be necessary to combine investment income on deferred annuities with income from current income streams for the purposes of the new tax on earnings over $100,000. We consider this proposed treatment should also apply to deferred lifetime pensions provided by defined benefit pension funds (the Government announcement was not clear as to whether this would apply). Impact on employers Nil (unless providing deferred defined benefit lifetime pensions, which may receive more favourable treatment) Impact on employees/retirees/members This proposal will give retirees more options to properly plan their retirement including the drawdown of their superannuation. By purchasing an appropriate deferred annuity (commencing at say age 85), they will have more confidence in drawing down their benefit before that age knowing their deferred annuity will kick in. Impact on trustees and superannuation providers Accumulation funds cannot offer deferred lifetime annuities they can only be offered by life insurance companies and possibly defined benefit superannuation funds. As such, there may be some leakage of retirement accounts from accumulation funds to life insurers. Further, income stream holders may be more willing to draw down their pension accounts at a faster rate. However there will be greater opportunities for funds to partner with life insurers to offer innovative retirement products using deferred lifetime annuities to provide longevity protection to retirees. ANNOUNCED REFORMS TO THE SUPERANNUATION SYSTEM: WHAT DOES IT REALLY MEAN FOR YOU? 9

12 7. Further reforms TO arrangements for lost SUPERANNUATION The Government has already put in place a number of initiatives through the ATO to help reunite members with lost super accounts. From 1 July 2013 interest will generally be paid on lost superannuation accounts reclaimed from the ATO. The account balance threshold below which inactive accounts and accounts of uncontactable members are required to be transferred to the ATO was also increased from $200 to $2,000. The Government will now further increase the account balance threshold for inactive and uncontactable members to $2,500 from 31 December 2015 and to $3,000 from 31 December Impact on employers Nil Impact on employees/retirees/members The major concern is the potential loss of insurance cover when accounts are transferred to the ATO. Impact on trustees and superannuation providers Trustees and superannuation providers will need to consider the impact on membership and any potential fall in fee income. Strategies to reduce the number of members classified as lost may become more important. 10

13 8. Council of superannuation Custodians A Council of Superannuation Custodians is to be established to ensure any future changes are consistent with an agreed Charter of Superannuation Adequacy and Sustainability. The Charter will be developed against the principles of certainty, adequacy, fairness and sustainability. The Council will be required to address future policy against the Charter and providing a report to be tabled in Parliament. Membership of the council is expected to comprise representatives from the community, industry and regulators. Mercer comments Whilst this is a laudable first step, it remains to be seen how effective this body will be and whether it will have any effective power. We expect future Governments will continue to make short term decisions in relation to superannuation despite any contrary views from the Council. ANNOUNCED REFORMS TO THE SUPERANNUATION SYSTEM: WHAT DOES IT REALLY MEAN FOR YOU? 11

14 Should you wish to understand more about the issues we have raised in this report please contact your local Mercer representative, or Mercer (Australia) Pty Ltd ABN Exhibition Street Melbourne VIC 3000 GPO Box 9946 Melbourne VIC This communication has been prepared by Mercer Consulting (Australia) Pty Ltd (MCAPL) ABN , Australian Financial Services Licence # Any advice contained in this communication is of a general nature only and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this communication you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering and seek advice from a licensed, or appropriately authorised financial adviser if you are unsure of what action to take. MERCER is a registered trademark of Mercer (Australia) Pty Ltd ABN Copyright 2013 Mercer LLC. All rights reserved. MKG16455_Announced Reforms To Superannunation_0413