Q. In the 2012 Budget, the then Gillard Government proposed an additional 15% Tax on Superannuation contributions for income earners over $300,000. Was this ever legislated? Was there any announcement by the Abbott mention on Budget night in relation to changing this?
A. Yes it was legislated and the tax is applicable to Concessional (where someone claims a tax deduction) Superannuation contributions made on or after 1 July 2012.
The law doubles the Contributions tax on Concessional Superannuation contributions to 30% for individuals who earn at least $300,000 in income from the 1 July 2012. The definition of “income” includes taxable income (Investment income, Salary and bonuses etc), Concessional Superannuation contributions (both Employer Superannuation Guarantee and salary sacrifice contributions) and Fringe benefits.
Sounds simple and reasonable enough to tax high income earners on their Retirement contributions. The Howard Government removed a similar tax called the Superannuation Surcharge for “high” income earners in May 2005. The Superannuation Surcharge was a complicated mess and took years to sort out. It is now back. The challenge is he complexity of this tax in collection and reporting.
There are already limits on how much individuals can put into Superannuation as Concessional Contributions without paying penalty tax. Up until 30 June 2014, $25,000 is the limit if under 60 and $35,000 if 60 and over. From 1 July 2014, $30,000 is the limit if 49 or under and $35,000 if turning 50 and over in that tax year. Superannuation funds now have to collect Contributions tax at 2 different rates; 15% and 30% on two different Contribution Caps. Not to mention the variation in Contribution Caps across the two different tax years!
Not convinced yet on the complexity? Where the $300,000 limit has been breached because of the level of Concessional contributions, the 30% contribution tax rate will only be applied to the amount of the contribution which caused the breach. For example if an individual with $290,000 in taxable income has an additional $25,000 Concessional contribution, they would pay the 30% contribution tax only on $15,000.
Presumably Superfunds have spent the money and have built the systems to report members caught by the higher tax contribution. I am not sure how Super funds will know to apply the additional tax. Consider that “Taxable Income” may not be known until Tax returns are submitted by the individual which could be 10 months after the end of Financial Year assuming they are lodged on time. What I do know is that all Superannuation fund members will pay for the extra cost of administration, compliance and collection regardless of whether they are caught by the tax or not.
My final point on this one is the cost to members versus the benefit in revenue received to government. This is a tax that has a limit on receipt as a consequence of other Superannuation Contribution limits applicable . The maximum additional tax the Government would receive for an individual who contributes at the Maximum Concessional Cap of $25,000, is $3,750. It will be interesting to see when Treasury report the revenue take on this. I doubt it will be anywhere near the cost of administering the system.
It would have been far simpler to apply a higher marginal income tax rate for those earning over $300,000. Sure you would likely have to apply a higher Fringe Benefits Tax (FBT) but they announced that change on Tuesday night as a result of the introduction of the Temporary Budget Repair Levy of 2%.
The Coalition Government on taking office in September 2013 committed to review previous legislation that added unnecessary complexity to the system. This one appears to have been missed as no mention of any change was made in this week’s Federal Budget.