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Government caps tax exemption on pension earnings

 

On Friday 5 April 2013, the Government announced a range of superannuation changes, and here's the full Media Release.

Here is an extract:

The Government will better target the tax exemption for earnings on superannuation assets supporting income streams, by capping it to the first $100,000 of future earnings for each individual.

Under current arrangements, all new earnings (such as dividends and interest) on assets supporting income streams (superannuation pensions and annuities) are tax-free. This is in contrast to earnings in the accumulation phase of superannuation, which are taxed at 15 per cent.

From 1 July 2014, earnings on assets supporting income streams will be tax free up to $100,000 a year for each individual. Earnings above $100,000 will be taxed at the same concessional rate of 15 per cent that applies to earnings in the accumulation phase. An individual with $100,000 of tax-exempt earnings typically receives more government assistance than someone on the maximum rate of the Single Age Pension. This reform will help make the superannuation system fairer and more sustainable, and will help restore a number of the original intentions of the system.

For superannuation assets earning a rate of return of 5 per cent, this reform will only affect individuals with more than $2 million in assets supporting an income stream. Treasury estimates that around 16,000 individuals will be affected by this measure in 2014-15, which represents around 0.4 per cent of Australia’s projected 4.1 million retirees in that year. This reform will save around $350 million over the forward estimates period.

The changes build on the superannuation reforms announced in last year’s Budget. The Government’s Superannuation Concession Reduction for contributions by very high income earners announced in the 2012-13 Budget, together with this reform of earnings on assets supporting income streams, will improve the fairness and long-term sustainability of the superannuation system. These two measures combined will save over $10 billion over the next decade.

 

 

 

  •   5 April 2013
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6 Comments
Daniel Jeffares
April 05, 2013

Can you explain how (given there hasn't been a sufficiently significant IPO I can recall) the 9% SGL going into the market each week isn't simply bidding up the price of existing shares for which there are more buyers than sellers? What happens when the tide reverses and the baby boomers withdraw what they're currently putting in to fund their lavish lifestyles, tax free (ish) in retirement?

Warwick Moyse
April 05, 2013

The estimate that only 16,000 people will be affected by the new rules is unrealistically low.

In a good year - like the past 12 months - share-based super plans could achieve 30%+ growth. On that basis, the new tax rule would affect everyone holding a mere $333,000 or more. Rather than benefiting from these good years to compensate for GFC-like events, the average growth rate of relatively small holdings will be choked by the new tax.

Most experts use an average growth figure of 6-7% p.a. to forecast the adequacy of super holdings - why has the Government used only 5% to estimate the impact of the tax?

Graham Hand
April 06, 2013

Hi Daniel, you raise a good issue, but let's consider some of the numbers. We have $1.5 trillion in super, and about 35% is in listed Australian equities. Call it $500 billion. The total market cap of the ASX200 is $1.3 trillion, so purchases of Australian equities by super funds are having a major impact on supporting the market. But the balances are not going to fall, they will only rise, to a predicted $6 trillion (in future dollar terms) in superannuation by 2030. This will probably be far greater than the size of the ASX200.

So in my view, the issue is not about the baby boomers withdrawing their money and creating more sellers than buyers in future, but how does the ASX support the demand for equities without pushing up prices to unrealistic valuations? It's one reason for the call to add new assets to the exchange, such as infrastructure stocks.

Daniel Jeffares
April 08, 2013

Thanks Graham, That makes sense. One way or another prices won't reflect value then? It would be interesting to hear from Chris Cuffe.

Cheers, Dan.

Warren
April 06, 2013

Warwick, you are talking about returns not investment earnings. Unrealised capital gains from an increase in share prices won't figure in the calculation of the amount that is to be compared with $100k.

The reason the government is only using 5% is because the world is in deep, deep trouble. Interest rates - the basis of all investment returns - are near zero in most countries and look locked in around 3% in Australia for a while to come. Long term bond rates are trading in the region of 3.5%. Dividend yields will eventually come down from their current lofty heights unless the world heals much faster than I expect it to.

Personally, I'm more worried that the 5% estimate is too HIGH, not too low.

I'm also worried the number of people who seem to have no idea how bad the world economy is doing and what that means for the long term outlook for investment returns. All those 'experts' still thinking about 6-7% that you refer to, for instance.

I hope like crazy I'm wrong, but everyone should be working out how they will live in a world of very low investment returns. The government may well raise much less revenue from this policy change than they expect to!

Warren
April 07, 2013

Thanks for that observation Rick.

However, gains can be realised from trading even in a modest market move, or a market that ends up flat, so in that case it's not just a matter of having a rising market.

I haven't seen any data on whether there is an increase in realised gains in unit trusts in strongly rising markets - if that's available, it would be interesting to see if there's a higher degree of such gains.

If so, then I'd regard that as quite irresponsible management by the fund manager as it isn't necessarily in the unit holders interests to generate all that taxable income. And one of the reasons why I know a lot of investors who prefer index funds, where trading doesn't take place.

 

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