..... have a range of implications for both investors and their financial advisers.

From July 1, 2014 future earnings on assets supporting income streams will be tax free up to $100,000 a year. Earnings above $100,000 will be taxed at the same concessional rate of 15 per cent that applies to earnings in the accumulation phase.

The $100,000-threshold will be indexed to the Consumer Price Index (CPI), and will increase in $10,000 increments. Assuming an estimated rate of return of 5 per cent, earnings of $100,000 would be derived from individuals with around $2 million in superannuation.

As such, the vast bulk of current pension phase superannuation investors will not be affected, with Treasury estimating that only 16,000 individuals (0.4 per cent) will earn more than $100,000 in 2014/15.

However, Don Hamson, managing director of Plato Investment Management, told Professional Planner these estimates are based on fund size rather than actual fund earnings.

“The 16,000 number is based on the number of funds exceeding $2 million, which are assumed to have a notional earnings rate of 5 per cent,” he said.

“Even if individual pension fund income does exceed $100,000 in a year, the new tax only applies to pension income over $100,000, and at the low rate of 15 per cent. Earnings up to $100,000 pa will still be tax free.”

Couple coup

For couples, this provides an incentive to, where possible, structure superannuation to be evenly split.

“However, to the extent that it can be quite difficult to move superannuation between couples, this proposal discriminates against couples with uneven superannuation balances, where one spouse earns substantially less than $100,000 per annum and the other earns more,” said Hamson.

“It also clearly discriminates against currently retired couples where superannuation is held solely in the name of one spouse, whose earnings might exceed $100,000 per annum. To this extent, one might consider this to be a retrospective tax on stay-at-home mothers.”

Franking and more

Hamson expects that franking credits generated on Australian shares could be used to offset any tax payable on pension incomes above $100,000.

Transitional arrangements will ensure that people who have already purchased superannuation assets will have 10 years to decide whether they want to restructure their superannuation holdings before their capital gains start to be affected.

Withdrawals will continue to remain tax free for those aged 60 and over, but face the existing tax rates for those aged under 60.

From July 1, 2013 a new higher unindexed-concessional-contributions cap of $35,000 will be available for people aged 60 and over.

The general concessional cap is expected to reach $35,000 from July 1, 2018.

Annuities anyone?

A spokesperson for Centric Wealth said government was encouraging the take-up of deferred lifetime annuities (DLAs) by providing these products with the same concessional tax treatment that superannuation assets supporting income streams receive.

“DLAs generally involve an individual buying the annuity at a certain age and delaying the payments until the individual elects to receive them,” she said.

“These annuities are not generally available in Australia as they are not qualifying annuities under superannuation law and not eligible for tax concessions as those aged 60 and over enjoy with their superannuation.

“However, the superannuation industry has called for this reform and as a result, the government’s superannuation roundtable is looking at making DLAs more attractive.”

Who are the beneficiaries?

Wealth manager Challenger Financial Group has been widely tipped as a beneficiary of the government reforms, with the new tax treatment of deferred lifetime annuities seemingly playing into the company’s hands.

Challenger chief executive Brian Benari welcomed the government’s clarification of its super reform package, saying the proposed measures should help address the looming issue of longevity risk among Australia’s ageing population.

“All Australians need secure lifetime retirement income and many could be retired for 25 years or more,” he said.

“Some of the suggested reforms should encourage super saving for the majority of Australians while addressing several perceived flaws in the tax regime, such as the punitive excess contributions tax.

“And the government hasn’t squibbed on the post-retirement phase of super, having cleared the way for proper longevity insurance in the form of deferred lifetime annuities.

“We welcome the leveling of the taxation playing field in this regard because proper longevity insurance removes the major ‘silent risk’ of retirement – running out of money in later years and being forced to survive on just the Age Pension.”

A spokesperson for Colonial First State said there were still a number of unresolved questions on the changes that will apply to defined benefit funds.

“At this stage it is unclear how these proposals would practically work,” she said. “However, to cater for individuals who have two or more pension funds, it seems likely that trustees will be required to report income amounts received by the fund in respect of each member.

“The proposed special arrangements for capital gains may also require trustees, including self-managed super fund trustees and their advisers to take into account the potential future tax treatment of a fund’s capital gains tax assets when reviewing the fund’s investment strategy and portfolio.”

Andrew Starke
8th April 2013
Source:  Professional Planner    www.professionalplanner.com.au