What are the new proposed reforms to the superannuation scheme and what does it mean for the average Australian?

On the 5th April 2013 the Labour Government announced substantial changes to super, with proposals including taxes on the income stream for pensioners, changes to the concessional contributions cap and changes in lost superannuation. LJ Financial has reviewed these reforms and the implications for both the working and retired individual.

Tax on Earnings in Pension Funds
This is for those who are in retirement and drawing a pension regardless of whether it is in a defined benefit or in an accumulation scheme. From July 1st 2014 the government, if the reforms are passed, will tax retirees with earnings greater than $100,000 p.a, a flat rate of 15%. The current tax rate on earnings in pension phase is nil, meaning this increase will effectively bring the tax rate in line with the current rate applied to accumulators.  Assuming an earning rate of 5%, this will likely affect those individuals with greater than $2,000,000 in superannuation representing around 0.4% of the population. Additionally, the Government has confirmed that under these proposed reforms any products currently held by pensioners before January 1st 2015 will be grandfathered; meaning they will be continually assessed under the existing rules for the life of the product and will not be affected by any proposed reforms.

Concessional Contributions Cap
A more relevant reform affecting most Australians, is the tiered increase in the concessional contributions cap. As of today’s date, all Australians regardless of age cannot contribute more than $25,000 pre-tax dollars per annum without receiving heavy tax penalties on their contributed funds.  The Government has proposed to increase this cap to $35,000 for individuals 60 years and over from July 1st 2013. From the 1st of July 2014 this increase will apply to those aged 50 years and over and by 1st July 2018 all Australians contributing to superannuation will be able to contribute $35,000 pre-tax dollars to their respective superannuation accounts.

In addition, the Government has reduced the excess concessional contributions tax from the highest marginal tax rate (46.5%) to the individual’s marginal tax rate as well as allowing individuals to withdraw any excess concessional contributions from superannuation post July 1st 2013.  This means the penalty for accidentally exceeding the limits will not be as harsh as currently applies.

Lost Super
A Further reform is in regards to lost superannuation and is to encourage individuals to take control of their superannuation. With over $18 billion in lost superannuation it is likely a large number of Australians have a lost superannuation account. The Government intends to increase the minimum account threshold from $2,000 to $2,500 on 31st December 2015 and then to $3,000 by the end of 2016 requiring these funds to be transferred and held by the ATO. This is to stop the funds being eroded by fees and charges.

Superannuation money being held by the ATO will earn interest equivalent to the Consumer Price Index. More importantly, This means there are a great deal of Australians unaware they are earning interest on funds they have thought lost or are unaware of their existence.


So what does this mean for the individual?
Overall LJ Financial views this as a positive outcome for individuals contributing to their superannuation. The intended increase in concessional contributions means that Australians can gain more out of their superannuation and shows the government is willing to have less involvement in the scheme. This allows individuals to take advantage of the increase in potential tax savings, which is a favourable outcome for most Australians.

In addition, taking control and understanding where and how your superannuation is invested is paramount. Ensuring that you are guided through tax implications of investing in superannuation is important and will also lead to more effective growth of assets.

Secondly, speak to a financial adviser who can assist you deciphering these and any other changes to the superannuation scheme by any governing body and provide you with strategies based around these proposed changes in order for you to achieve both your financial and lifestyle goals.

Finally ensuring that you mitigate any compliance issues around your superannuation and getting advice on what constitutes a compliant superannuation fund will help lead to prudent investment and growth of wealth.



Duncan Brown
Private Client Adviser