Australia Tightens Pension Fund Tax Rules for Wealthy

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By Murray Griffin

Nov. 28 — Australia’s parliament has scaled back widely criticized pension fund tax breaks available to high-wealth individuals.

Parliament passed two bills Nov. 23 that amend the Income Tax Assessment Act 1997 and some other laws, after the government overhauled its initial proposals to secure the Senate’s support.

The changes aim to re-balance the distribution of superannuation—or organizational pension fund—tax concessions, 40 percent of which flowed to the top 10 percent of income-earners in the 2012 financial year, according to data published by Treasury in 2014.

The legislation does this by changing the caps on pre-tax “concessional” and post-tax “non-concessional” contributions to superannuation funds, and by introducing a new limit on the amount of capital that individuals can transfer to tax-free “retirement phase” superannuation accounts.

Concessional contributions typically comprise compulsory employer contributions and contributions voluntarily “salary sacrificed” out of wages before tax.

Non-concessional contributions to superannuation can include proceeds from the sale of assets.

Currently, those earning up to 37,000 Australian dollars ($27,658) pay no tax on concessional contributions, those earning between 37,000 Australian dollars and 300,000 Australian dollars pay 15 percent tax, and those with incomes above that amount pay a rate of 30 percent.

These tax rates are significantly lower than income tax rates.

The changes, which take effect next July 1, lower to 250,000 Australian dollars the income threshold at which the 30 percent rate applies.

They also reduce the cap on annual concessional contributions to 25,000 Australian dollars, down from the existing range of 30,000 Australian dollars to 35,000 Australian dollars.

The tax changes to concessional contributions are expected to save the budget 2.3 billion Australian dollars.

The bills also introduce a cap of 1.6 million Australian dollars on the total capital that can be transferred to a tax-free “retirement phase” superannuation account.

Superannuation savings beyond 1.6 million Australian dollars can remain in an accumulation account, where earnings are taxed at 15 percent.

Under the previous law, there was no limit on the amount of capital an individual could place into a retirement phase account.

Impacts Fewer Than 1 Percent

Although the Treasury estimates fewer than 1 percent of Australia’s superannuation account holders will be affected by the transfer balance cap, introducing the measure is expected to save the budget 1.85 billion Australian dollars over the next three years.

The bill also lowers the cap on annual non-concessional contributions to superannuation from 180,000 Australian dollars to 100,000 Australian dollars, or 300,000 Australian dollars in any three-year period, which is expected to save 200 million Australian dollars.

Senators from the opposition Labor Party argued that the reform package “remains too generous for Australians on higher incomes,” in comments included in a Senate committee report on the bill, released Nov. 23.

Nevertheless, they didn’t vote against the legislation, on the basis that it represented an improvement on current arrangements.

Funds Industry Against Further Changes

The Association of Superannuation Funds of Australia welcomed the passing of legislation and urged the government not to make further changes to the tax treatment of superannuation.

ASFA chief executive Martin Fahy told Bloomberg BNA Nov. 28 the changes are welcome.

When superannuation schemes were first introduced in Australia, they contained tax concessions that were “very generous to those on high incomes and in the high tax brackets,” he said.

The changes will “recalibrate some of the generous provisions” and make the superannuation system more equitable, he said.

Fahy noted the ruling Liberal-National Party Coalition government had promised not to make more tax changes to superannuation before the next election, although the opposition Labor Party is committed to further reining in tax benefits for high-income earners.

He also urged the Australian Taxation Office to move quickly to issue guidance on the changes.

John Daley, chief executive of the Grattan Institute think-tank, said the changes are “a substantial step in the right direction.”

The bills will overhaul tax rules that are “giving big tax breaks to people who were always going to have an extremely comfortable retirement,” he said.

Daley said the changes would take about 2 billion Australian dollars a year away from people “who are very well off.”

It would give about 1 billion Australian dollars of that back to those on extremely low incomes and those who, until now, haven’t been able to voluntarily “salary sacrifice” some of their wages into superannuation, he said.

Nevertheless, he said the changes don’t go far enough.

“The reality is the system remains pretty untargeted,” Daley said. “There is still an awful lot going to the people at the top who are essentially getting much more of a tax break than everyone else, even though they need it less.”

To contact the reporter on this story: Murray Griffin in Melbourne at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 and an explanatory memorandum are at http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr5760%22.

The Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 and an explanatory memorandum are at http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr5761%22.

A report on the two bills by the Senate Economics Committee is at http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/SuperReformbillsx2.

A parliamentary library digest of the bills is at http://parlinfo.aph.gov.au/parlInfo/download/legislation/billsdgs/4951864/upload_binary/4951864.pdf;fileType=application/pdf.

Treasury fact sheets on the changes are at http://www.treasury.gov.au/superreforms.

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