Superannuation and the 2012 Budget

The widely proclaimed ‘Robin Hood’ budget of the Labor government was released on Tuesday 8 May. Among other areas, superannuation and higher income earners were affected in order to fund the cash assistance being provided to low and middle income families. As many Rivkin members use superannuation as part of their investment strategy, we think it’s important to comment on how this may affect you and your super.

There are two main measures to come out of the Budget that will have an impact on superannuation. Firstly, there is an effect on those who earn more than $300,000 p.a. and contribute to super. Should you be one of those who earns over this amount, any contributions that you make to super will now be taxed at a higher rate of 30%, as opposed to 15%, from 1 July 2012. The definition of ‘income’ for the purposes of this measure includes superannuation contributions made, so you cannot use salary sacrifice methods to lower your taxable income in this circumstance. Aside from this, it is still unclear as to how this ‘income’ will be calculated.

This is implementing a measure similar to the Superannuation Contributions Surcharge, which existed prior to 1 July 2007.  While it seems like this “Surcharge” tax would not apply to many of you, in reality it means that every fund may be required to report additional information to the Australian Taxation Office (ATO) in order to administer the tax, placing a burden on financial planners, accountants and administrators. Costs then increase and this is a concern for everyone, not just high income earners. Furthermore, in 2005 the Australian National Audit Office (ANAO) released a performance audit report on the ATO’s administration of the Surcharge. While the principle of re-distributing wealth was acknowledged, ANAO concluded that the management and administration of the Surcharge had not been conducted well. It was complex and costly to manage, and put significant pressure on the ATO’s resources. Given previous experiences, this announcement has understandably been met with criticism from the superannuation industry.

The second main announcement to come out of the Budget with respect to super is the Government’s decision regarding the concessional contributions cap. For the 2012 financial year, individuals under 50 years of age could contribute up to $25,000 in concessional contributions (i.e. employer contributions, salary sacrificed contributions and any other contributions for which a deduction was claimed). A transitional contributions cap of $50,000 exists for those over 50 years of age, which is due to expire less than two months from now on 30 June 2012. From 1 July 2012, everyone will be subject to the lower concessional contribution cap of $25,000.

Prior to the Budget’s release, there was talk of extending the transitional cap limit for those over 50 years of age, if they had a superannuation account balance of less than $500,000. However, this has now been delayed for two years and will now commence from 1 July 2014. This deferral will provide government revenue of $1.46 billion over the next four financial years, and is the single largest superannuation revenue raiser in the Budget.

In its need to meet the political goal of delivering a Budget surplus, it appears that the Government has seriously undermined confidence in the superannuation system, both with the financial services industry, and with individuals. In particular, the deferral of the higher contributions cap for over 50’s will really affect those wanting to contribute more towards their super in the lead up to retirement, in a tax-effective manner. Some might ask why the government would introduce such measures when it is supposed to be encouraging people to save for their own retirement in preparation for an ageing economy and the rising cost of the Age Pension. Others may even question the principle behind delivering a Budget surplus (i.e. tightening fiscal policy) during uncertain economic times, when economic principle states that fiscal policy should be expansionary.  Unfortunately, in the media storm of cash handouts and political scandals, we’re unlikely to hear an answer.

To read more about the Budget, visit http://www.budget.gov.au/2012-13/index.htm.

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