From 1 July 2012, individuals with income greater than $300,000 will have the tax concession on their concessional contributions reduced from 30% to 15% (excluding the Medicare levy). This means that the tax rate on concessional contributions will effectively double from 15% to 30% for very high income earners from 1 July 2012.
Currently, the 15% flat tax on concessional contributions (paid by the receiving superannuation fund) provides high income earners with a significantly larger tax concession than those on lower marginal tax rates. The Minister for Financial Services and Superannuation, Mr Bill Shorten, said a small number of people on high incomes are getting a better tax deal out of super than millions on average incomes. The proposed reduction in the higher tax concession that is currently available for very high income earners on their concessional contributions will align it more closely with the concession received by average income earners, Mr Shorten said. However, there will still be an effective tax concession of 15% (up to the concessional contributions cap of $25,000) for these high income earners.
Income test
The definition of “income” for the purpose of this measure will include taxable income, concessional superannuation contributions (eg superannuation guarantee contributions and salary sacrificed contributions), adjusted fringe benefits, total net investment loss, target foreign income and tax-free government pensions and benefits, less child support.
If an individual’s income (excluding their concessional contributions) is less than the $300,000 threshold, but the inclusion of their concessional contributions pushes them over the threshold, the reduced tax concession will only apply to the part of the contributions that are in excess of the threshold. For example, someone with income excluding their concessional contributions of $285,000, and concessional contributions of $20,000 (taking their total income to $305,000), would have the reduced tax concession only apply to $5,000 of their contributions.
Concessional contributions
Importantly, the reduced tax concession will not apply to concessional contributions, which exceed the concessional contributions cap of $25,000 and are therefore subject to excess contributions tax (ECT). Excess concessional contributions are effectively taxed at the individual’s top marginal tax rate and therefore do not receive a tax concession.
“Concessional contributions” for the purpose of this measure include all employer contributions (both superannuation guarantee and salary sacrifice contributions) and personal contributions for which a deduction has been claimed. For members of defined benefit funds (both funded and unfunded schemes), it will include all of their notional employer contributions.
No change to taxation of super fund earnings tax rate
Mr Shorten said the 15% flat tax on earnings within superannuation (and tax exemption for assets supporting pension payments) will not be affected in any way by this reform. Rather, the proposed reform will only reduce the tax concession which very high income earners receive on their contributions into superannuation, Mr Shorten said.
The Minister said the proposed measure is expected to save $946m over the forward estimates and will affect 128,000 individuals in 2012-13.
Treasury will consult with the superannuation industry and other relevant stakeholders on further design and implementation details.
Date of effect: The measure will apply from 1 July 2012.
[Thomson Reuters comment: Deborah Wixted, Executive Manager, FirstTech, Colonial First State, noted that taxpayers with income over $300,000 (who are currently making full use of $25,000 concessional cap) will pay an additional $3,750 in contributions tax from 1 July 2012 under this measure. Accordingly, such high income earners would need additional salary of $7,009 to make up for this loss, Ms Wixted said.
Precisely how (and from whom) the Government will collect this additional 15% tax on concessional contributions for very high income earners will be determined following consultation with the superannuation industry. No doubt the Government may consider reintroducing a superannuation surcharge tax regime to collect this additional contributions tax directly from the superannuation fund holding the contribution on behalf of the very high earner.]
Source: Budget Paper No 2 [pp 41-42]; Minister for Financial Services and Superannuation press release, 8 May 2012
[WTB 19, 8/5]