2016 is likely to see a number of changes to the superannuation system in Australia, with both major political parties agreeing it’s time to reduce the system’s burden on the country’s tax revenue. The changes being discussed are aimed at reducing retirees’ reliance on the aged pension as well as opening up new opportunities for superannuation funds to contribute to tax revenue.
Brad Eppingstall, director, RSM Australia, said, “Superannuation has always been subject to fluctuating rules and the current issues of tax reform are unlikely to go away. As the government continues with its tax white paper process, and we head towards a likely election at the end of the year, super tax concessions will play a bigger role in the debate.”
RSM Australia advises the key superannuation issues to consider in 2016 include:
1. Capping tax-free incomes in retirement
The Association of Superannuation Funds of Australia (ASFA) has suggested a lifetime cap of $2.5 million tax-free for every super fund (click here to read SMSF Association Budget Submission 2015 ). The rationale is to encourage people to save for an adequate retirement without underpinning further wealth-creation within super funds. An alternative could include capping the total allowable contributions amount.
2. Limiting tax concessions on contributions
A recent Grattan Institute report suggests that wealthy people who use superannuation funds to reduce their tax rates should be stopped by limiting the amount of pre-tax income they can get concessions on, and ensuring earnings in retirement are taxed (click here to read Grattan Institute Super tax targeting). Currently, people earning less than $300,000 per annum pay 15 per cent tax on their pre-tax compulsory contributions, while those earning more than $300,000 per annum pay 30 per cent tax. This has let the wealthy use superannuation to minimise tax, rather than to save specifically for retirement.
3. Taxing withdrawals
Currently, over-60s pay no tax when they withdraw from super. For the top 10 per cent, that means an average income of $85,000 per year, tax-free. Part of the suggested reforms includes a 15 per cent tax on earnings in retirement. The Grattan Institute report says more than half the benefit of tax-free earnings in retirement goes to the wealthiest 20 per cent of retirees. By taxing retirement earnings, the government could gain more than $2.7 billion per year.
4. Removing anti-detriment payments
Anti-detriment payments effectively refund the 15 per cent contributions tax for the eligible dependants of deceased fund members. Claiming these payments is complex and difficult, and requires the help of an experienced advisor. These payments have historically been applied unevenly and favour lump sum payments over income streams.
5. Changes to franking credits
Franking credits benefit investors who, instead of paying the full marginal tax rate on dividends, simply pay the difference between the corporate tax paid by the company, and their marginal rate. In many cases, the difference favours the shareholder, who receives a cash refund from the government and ensures none of their income is taxable. The government claims that the current system favours the wealthy and that investors are exploiting the system.
6. Adequacy of superannuation
In the future, Australian retirees will not be able to rely on the aged pension and will, instead, need to fund their own retirements. This means it will be more important to make sure people have enough super to live comfortably. The amount of super you need depends on your personal circumstances and preferences. For example, if you own your own home and are in good health, you may not need as much super as someone with health issues. Many women are worse off than men because they have taken extended breaks from the workforce to raise families. There is some discussion of flexibility being built into new rules to let women catch up.
7. Removal of accountants’ exemption
On 1 July 2016, accountants will no longer be able to provide advice on the establishment of self-managed super funds unless they have an Australian Financial Services licence.
Brad Eppingstall said, “The Australian superannuation industry remains in a state of controlled flux. Professional advice is vital to help you navigate the current and potential future rules while minimising your tax burden and maximising your retirement income.”