This morning Treasurer Wayne Swan and Superannuation Minister Bill Shorten have announced a raft of rule changes to the tax treatment of superannuation accounts. 

We consider that three of the announced changes may have a significant impact on a vast number of our superannuation clients, so we focus on these three issues.

Removal of tax exemption on earnings from some pension accounts

The Government has announced, from 1 July 2014, the introduction of a $100,000 cap on the tax exemption of superannuation earnings generated by pension and annuity accounts, with anything above that cap taxed at a rate of 15 per cent. 

Under current arrangements, all earnings on assets supporting pension income streams are tax-free, in contrast to earnings in the accumulation phase of superannuation, which are taxed at 15 per cent.

Superannuation earnings below the $100,000 cap will remain tax-free.  The $100,000 threshold will be indexed to the Consumer Price Index (CPI).

The Government anticipates, based on their conservative estimated rate of return of five per cent, earnings of $100,000 would be derived from individuals with around $2 million in superannuation, and they expect approximately 16,000 people will be affected by this reform.

These changes will not affect the tax treatment of withdrawals, and it is expected that withdrawals will continue to remain tax-free for those aged 60 and over, and those under 60 years old will be subject to the existing tax rates.

It should be noted that the announced reforms will not be legislated before the election, raising some doubts over the prospect of any part of the package being put into place.

Increasing concessional contribution caps

The government has also proposed lifting the annual concessional contribution cap of contributions from $25,000 to $35,000 from 1 July 2014 for taxpayers aged 50 and over.

The proposed new higher cap would apply from 1 July 2013 for taxpayers aged 60 and over.  The $35,000 concessional cap will not be indexed for future tax years.

Excess contributions tax penalty rate reduced for some taxpayers

Currently, when a taxpayer makes a contribution in excess of the respective contribution cap, they are deemed to have made an excess contribution and are subject to a strong penalty by the excess amount being taxed at the top marginal tax rate.

The Government has announced that from 1 July 2013, any excess concessional contributions will be taxed at the taxpayers' own marginal tax rate and an interest charge to recognise that the tax on excess contributions is collected later than normal income tax. 

This will mean that individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages.

This will be an improvement for those taxpayers not subject to tax at the top marginal tax rate, however for those being assessed at the top tax rate, they will now also have a slightly larger tax liability because of the new interest charge.

Please do not hesitate to contact your Lowe Lippmann advisor if you wish to discuss any of these matters further.